The construction sector faces a growing cashflow crisis, according to research from accountancy and advisory firm Menzies.
The industry is increasingly grappling with with late payments, rising costs and loss-making contracts pushing thousands of firms towards financial distress, Menzies said.
The findings, published in Menzies’ latest report, Fixing the Foundations, paint a stark picture of an industry under mounting pressure.
The report, based on a survey of 250 senior finance decision-makers at UK construction and property firms, found that 86% of businesses are either already experiencing or are at risk of serious financial distress.
The average firm expects to reach that point within the next eight months.
The warning comes as construction continues to top UK insolvency statistics, highlighting the fragile financial position of many firms despite strong pipelines of work.
Late payments have become a near-universal challenge across the sector. According to the research, 93% of firms are waiting for payments from clients, contractors or supply chain partners, with invoices remaining unpaid for an average of 53 days beyond agreed terms.
The consequences are significant. One in five firms (20%) report financing projects from their own working capital while awaiting payment, effectively acting as lenders to clients. Meanwhile, 18% identify late payments as one of the greatest threats to their business.
Rising costs are compounding the pressure. Nearly a quarter of respondents (23%) said escalating material and labour expenses are placing unsustainable strain on project margins.
Firms locked into fixed-price contracts agreed before the inflation surge have been particularly affected. One in five (20%) reported that such contracts are now significantly less profitable than anticipated, while a further 18% said some projects have been delayed to the point where they are no longer profitable at all.
Almost every business surveyed (98%) cited fixed-price agreements signed before inflation accelerated as a major source of financial pressure.
External economic factors are adding further uncertainty. Nearly one in five firms (19%) said recent changes to US tariffs have increased the cost and difficulty of sourcing materials and labour, while 17% pointed to the ongoing impact of Brexit. At the same time, 15% said investment in technologies such as artificial intelligence to remain competitive is creating additional financial strain.
When asked what measures would improve sector stability, respondents pointed to a combination of regulatory reform and government intervention.
A quarter (25%) called for government action to stabilise material and energy costs, while 24% backed the creation of a single construction regulator to replace what they view as a fragmented oversight system.
Mandatory maximum payment terms for construction contracts were supported by 23% of respondents, while one in five called for greater supply chain transparency, stronger protections and increased flexibility to renegotiate fixed-price contracts affected by inflation. Eighteen per cent said stricter enforcement of prompt payment rules would help improve financial stability across the industry.
Menzies partner Freddy Khalastchi said: “Too many construction businesses are still trading, still winning work, but heading in the wrong direction without realising it. A full order book can mask a lot of problems, and in construction the gap between looking busy and being profitable can widen faster than most owners appreciate.
“Most firms usually come to us for advice because something has forced their hand, but by that point, the routes available for recovery are far narrower than they would have been six months earlier. The firms that manage to work through their financial issues are not always the biggest or most resourced. They are the ones that recognised the warning signs earliest.”
