Nick Holloway is a managing director and construction sector specialist at Interpath Advisory
Twelve months is a long time in construction. This time last year, market confidence had plummeted amid rampant inflation that dominated boardroom attention. Input costs have since settled, but as we look towards 2025, a more complex set of challenges are emerging.
“We’ve seen some lenders further reduce their appetite to reflect the greater risk they see throughout the market”
At the time of writing, the Construction PMI is sitting at a relatively healthy 54.3 (a score above 50 indicates that construction activity is increasing), suggesting a return to growth and a healthy report card. But for many, the reality on the ground is different.
The industry reaches the year-end more than a little bruised after a battle to protect margins against suffocating fixed-price contracts that tested even the most established players, peaking with the collapse of construction group ISG in September.
The fallout from such a major failure in the market is only just emerging. The long tail of distress that such insolvencies leave behind can be devastating. However, such major market tremors are also felt beyond creditor lists. The ISG case has reiterated the persistent risk of large failures in the sector, which weighs on the confidence of lenders, investors, surety providers and credit insurers.
The appetite to capitalise contractors is already limited. While private equity has not been a prolific investor in construction, it may see the ISG case as a cautionary tale, deterring other entrants. Meanwhile, we’ve seen some lenders further reduce their appetite to reflect the greater risk they see throughout the market and, equally, surety providers and credit insurers are on high alert, with cover harder to obtain. There is always support to be found in these markets, especially from specialist providers, but nevertheless, financing negotiations will need even greater care in the coming year.
Another factor that will shape 2025 is likely to be the Building Safety Act 2022. A wave of litigation is working its way through the supply chain and, as more cases get tested in arbitration and the courts, we could start to see material claims crystallising. The figures involved are sizeable, putting further financial pressure on those affected.
Clear sight of the challenges
Taking a further step back, you can’t overlook the wider challenges in the economy – from labour shortages to fragile economic growth, an increasing tax burden and the impact of geopolitical instability. The legacy of the government’s opening Autumn Budget will be the third factor that determines how 2025 plays out, not least its plans to kickstart homebuilding and infrastructure investment. It’s too early to say how the shift in policy might impact spades in the ground or the health of balance sheets. But with the Construction PMI having closely tracked GDP in recent years, much will be pinned on its success.
Between recapitalisation demands, economic jitters, political promises and the threat of litigation, this is a complex environment to operate in and contractors would be forgiven for looking to 2025 with trepidation. But for business leaders, the key is to look at your options early and engage with stakeholders proactively to articulate your position and vision. Throughout, it is critical that management teams have clear visibility of cashflow and forecasts, no matter how challenging they may be.
All this would put contractors in the best position to take on whatever next year holds. I know that leaders in the industry have the resilience to take it on, so here’s to 2025, and let’s hope the next 12 months are just as memorable as the last – but for all the right reasons.
