Construction supply chain: liquidity is the priority

The construction sector is under pressure, recording more company insolvencies than any other sector in England and Wales: 3,873 in the 12 months to September 2026, accounting for 17% of cases. This headline hides a more worrying statistic for the construction supply chain. Specialised construction firms, the subcontractors and trades at the sharp end of every project, made up 59% of construction insolvencies in September 2026.

Each part of the supply chain faces its own pressures:

Subcontractors: Subcontractors carry risk passed down the supply chain. Work priced before costs rose leaves margins squeezed, and retentions held for months tie up cash already earned. Payment depends on the main contractor settling invoices, so any delay upstream hits cash flow directly. One upstream failure can severely impact several businesses.

Plant hire: Fleets bought for a busier market will be financed on terms that must be repaid whatever the demand. Falling utilisation and pressure on hire rates lead to pressure on liquidity first but then impacts asset values. These valuations are often what a firm’s financing is based on, and a key metric for lenders.

Building material suppliers: Volumes are falling while higher employment, energy and transport costs adds pressure to margins. Some housebuilders impose terms of 90 or 120 days which creates working capital stress. Trade credit insurance is common across the sector but can be withdrawn or reduced if the insurer’s view of the sector or customer deteriorates.

For these businesses and their lenders, the key question is whether they have enough cash and liquidity to see them through this challenging period.

Tough conditions now, but opportunities ahead

The next few months remain difficult. The Construction Products Association (CPA) expects total construction output to fall 4% in 2026, with private housing and housing repair, maintenance and improvement (RMI) hit hardest. Many subcontractors and suppliers rely on these markets. Sector activity has now contracted month-on-month since January 2025, with clients deferring decisions and sales taking longer to convert.

At the same time, firms are facing rising prices and a higher cost of credit.  Expectations are for inflation to climb to 4.2% in Q1 2027, as the Middle East conflict keeps energy prices high, and the Bank of England raised the bank rate by 0.25% to 4.00% on 5 November, which will increase the cost of borrowing. 

Opportunities lie ahead, though:

• The CPA still forecasts growth, given longer-term existing contracts, pipelines of activity and funding in place for future projects in energy generation, National Grid distribution work and water investment. Sector output is forecast to rise by 2.9% in 2027.
• Areas of expected growth include energy distribution, data centres, water infrastructure, commercial refurbishment and fit-out, general energy-efficiency improvements and public building programmes. Refurbishment, utilities and public sector programmes offer steadier demand than private housing, and there are opportunities for supply chain firms who can successfully reposition.
• We expect some consolidation in the market as well-capitalised buyers look for fleets, order books and skilled teams from owners under pressure.

Managing cash during this difficult period will therefore be key to benefiting from any growth in 2027.

Commercial Payments Bill and Your First Home scheme

Two policy initiatives could positively impact businesses in the construction supply chain in the next 12 months:

In the Budget on 28 October, the Chancellor, John Healey, confirmed the Your First Home scheme. This lets first-time buyers purchase a new-build home with a 2.5% deposit and a 20% government equity loan, backed by £4.7 billion of funding. The first loans are due from April 2027. Time will tell whether it lifts new-build activity enough to reach the supply chain.

The Commercial Payments Bill, introduced in the House of Lords in May 2026, would ban construction retentions, cap most private sector payment terms at 60 days (30 days for public sector payers) and make interest on late payment mandatory at 8% above Bank Rate. As drafted, retention clauses in new contracts would become void two years after commencement, and existing clauses would cease after three years. The Bill is still moving through Parliament and may change.

The long-term benefit for subcontractors is clear, who would no longer lose retentions when an upstream party fails. However, risks still remain:

• Without retentions, upstream parties may look for other ways to protect themselves such as bonds or letters of credit, which could be costly for subcontractors to arrange.  
• The 60-day cap on payment terms is intended as a ceiling, but it could become the standard payment term, extending payment profiles for businesses that typically pay faster today.  

Acting early to protect liquidity keeps options open

Many otherwise viable businesses in the construction supply chain may face distress unless carefully managed. It is often a shortage of working capital, rather than a lack of underlying profitability, that tips an otherwise sound business into difficulty. The risk is highest where cash reserves are low, lenders can withdraw facilities at their discretion, or where the business is falling behind on payments to HMRC or suppliers.  

Early identification and intervention matter, whether the issue is short-term cash flow pressure, refinancing or covenant compliance. Businesses that seek advice early are the ones most likely to secure the outcomes they want. When management teams leave it too late, options narrow and firms may be forced into expensive short-term lending that only leads to further problems as debt service costs mount.

As well as considering options, directors of struggling companies should take professional advice early on their duties, including the duty to consider creditors’ interests as businesses get closer to an insolvency position.

Key questions to ask now 

Boards, owners and lenders should be asking these questions now:

1. How many weeks of cash coverage do we have, based on a 13-week forecast updated weekly?
2. Which contracts are losing money, and which customers pay slowest?
3. How exposed are we if one main contractor or customer fails?
4. When do our facilities and covenants next come up for review, and how much headroom is there?
5. Are we up to date with HMRC and key suppliers, and what happens if we’re not?
6. Could any completed project or group company projects attract claims, such as under the Building Safety Act?

How Grant Thornton can help

Grant Thornton’s Debt & Capital Advisory and Turnaround & Restructuring teams work with owner-managers, management teams, lenders and investors at each stage of stress. We can help you:

Spot it early: rolling 13-week cash flow forecasts, contract-level profitability reviews and stress testing

Stabilise: discussions with lenders, HMRC and key suppliers on forbearance, time to pay and covenant resets

Fix it: pricing and cost reviews, working capital release, disposal of non-core assets and a plan lenders will back

Fund it: refinancing, asset-based lending and asset finance alternatives

Protect your exposure: supply chain monitoring and exposure reviews for lenders, creditors and investors

Restructure where needed: assess the options available to you and support you through difficult times.  We can explore and support you through company voluntary arrangements, restructuring plans, pre-pack sales and administration, to protect value and jobs

If you’re seeing these pressures in your own business, or among your customers and borrowers, speak to us early. A confidential conversation now keeps more options open later.