Like so many others, the construction industry finds itself in a difficult position entering 2024, as it suffers from the effects of a declining economic climate. The construction industry, an industry incredibly reliant on the positive cash flow of its businesses, is greatly impacted by economic downturn, from impacts on demand to increased insolvency. In this environment, it is important to understand the likely repercussions on the construction industry so businesses can prepare and adapt.

Impacts on Demand

One of the most immediate and obvious impacts of the declining economic climate will be a reduction in demand for new projects. As businesses and individuals attempt to reduce expenditure, the demand for both commercial and residential construction is likely to fall. This is likely to be exacerbated by rising interest rates and inflation, which has led to the delay and/or cancellation of many projects and builds. 2023 saw a downturn in construction activity but not as low as expected; a bigger fall is forecasted to come this year.

The housing industry, in particular, is likely to remain impacted, as mortgage affordability, the most significant hurdle, remains a key issue going into 2024.

This will result in lower revenue for construction businesses and, significantly, it may have negative consequences for cash flow. It means that those in the industry will be pressured to accept work that is lower value and/or beyond their specialism, and this may lead to an increase in disputes as a result. It also represents an opportunity for those businesses to diversify and adapt in order to mitigate the effects of low demand in 2024.

Insurance and Loans

It is likely that as the downturn continues, insurance and loans to fund builds may become harder to obtain, with insurers and lenders becoming more risk-averse. This works hand in hand with issues faced by individuals, such as the aforementioned mortgage prices, that will continue to make it difficult to fund new construction projects in 2024.

Insolvency to increase

With similar issues impacting demand within the industry, it is to be expected that some businesses will struggle to stay afloat. This may have a knock-on effect on ongoing builds, where contractors find themselves unable to continue working on a project. Though material costs generally are likely to decrease this year, certain materials – such as ready mixed concrete and cast and iron products – are projected to show double-digit growth in prices; with such materials being vital in building projects, contractors may be unable to keep up.

This may also cause issues for subcontractors as contractors struggle to afford to work on builds; subcontractors could see their payments delayed or even unpaid due to contractor’s cash flow issues. This is then likely to increase litigation in the industry as subcontractors look to smash and grab adjudications to obtain quick injections of cash and remedy balance sheet issues.

The Bigger Picture

Despite the gloomy outlook, there is some hope going forward. Whilst 2024 is likely to follow similar trends to the previous year, there are projections for an upturn in output by the industry in 2025. However, such outlooks may be impacted by both global forces (such as the continuing Ukraine/Russia War) and government initiatives.

As 2024 rolls on, and the impacts of the downturn are realised, if you are about to embark upon a construction project – as contractor, subcontractor, employer or client – or require any assistance in relation to a construction dispute, please get in touch. I can be contacted on 0330 818 2931 or via email at suryen.nullatamby@birkettlong.co.uk