The price adjustment formulae is a method of calculating the increase, or decrease, in contractors’ costs over any period. The formulae and indices (over 200 of them) are widely used in various sectors in the construction industry, including civil engineering contracts and facility management.
Published: 15/11/2023
Construction firms accounted for 16.9% of all insolvencies in England and Wales in September 2023, according to the Insolvency Service, with 332 registered construction businesses becoming insolvent.
In the year to September 2023, the total number of construction firms becoming insolvent was 4,287. This was an increase of 8.3% on the 3,958 insolvencies recorded in the year to September 2022, and a 33.2% increase on the 3,218 in 2019.
Source: The Insolvency Service
In Scotland, there were 13 construction company insolvencies in October 2023, accounting for 13.1% of all insolvencies. This was four fewer than in September 2023, and three fewer than in October 2022.
The total for the 12-month period up to October 2023 was 220, which was a 20.2% increase on the 183 insolvencies in the year to October 2022, and a 6.3% increase on the 207 in 2019.
Source: The Insolvency Service
By rough comparison, in 2022, construction firms accounted for 13.5% of all registered businesses in the UK, suggesting the industry is still disproportionately affected by insolvency.
Within the construction industry, firms categorised as providing specialised construction activities are consistently the most affected across Great Britain. This includes companies providing a range of work, typically on a subcontract basis, from demolition and site preparation, to electrical and plumbing installation, and finishing work like plastering, painting and glazing.
The Insolvency Service also publishes figures for Northern Ireland, but not with industry breakdowns.
Analysis by EY-Parthenon on profit warnings issued by listed construction companies has shown particular vulnerabilities in the industry. In its 3Q2023 report, it revealed of 76 total profit warnings, six were in house-building. Further, it said out of 27 profit warnings in the last six months that pointed to the slowing housing market as a contributory factor, the biggest group affected was firms in the FTSE Construction and Materials category, which doesn’t include housebuilders.
A multitude of factors feed into company insolvency, though analysis of 20 years’ worth of profit warning data by EY suggests the construction industry is particularly vulnerable to financial difficulty. This is in part due to the nature of contract cycles and the challenges of cash flow management that contractors and subcontractors are subject to.
An effective way of mitigating the risks associated with fixed-price contracts when costs are so changeable is to use fluctuation clauses linked to work category and resource-specific inflation indices, such as the BCIS Price Adjustment Formulae Indices (PAFI).
The data in these indices, covering more than 200 work activities across building, civil engineering, specialist engineering and highways maintenance, can also be used throughout the budgeting and procurement stages to plan cash flow more effectively.
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