Rupert Rawcliffe, construction sector director at finance and business advisors Grant Thornton UK LLP commented: "The disturbing trend of increasing construction business failures for three consecutive quarters has finally been curbed with a 16% fall in administrations in Q2 2011 compared to Q1.
"Construction businesses are usually the first to feel the pain when the economy is hit. As such, the spike in Q1 2011 highlights the severe impact bad weather conditions had on the industry - as work was put on hold, cash-flow suffered and those businesses that were already on the brink tipped over the edge.
"In contrast, Q2 marked the hottest April for 100 years and as projects got moving again confidence picked up.
"With overall corporate failures rising slightly in Q2 2011 across the UK economy, the fall in construction administrations during this period demonstrates a resilience among businesses in this sector. As recession hits construction first these companies are battle hardened and are fighting very hard to compete. They will have an absolute focus on managing cash flow and will have learnt how to maximise funding via leveraging their assets via asset based lending and specialist finance.
"The still high number of failures does however reflect the tough economic environment and is now no worse or better than we saw during the first part of last year. Construction firms have seen work levels remain low and margins remain under pressure with the workforce now intensively deployed, stretching resources.
"This also mirrors the results of the Grant Thornton/ICAEW Business Confidence Monitor (BCM) from Q2 which showed that sector confidence has increased marginally since the beginning of 2011 but remains cautious," said Rawcliffe.
A survey from Markit/CIPS UK Construction PMI - UK construction draws similar conclusions. It finds that new orders and output are broadly consistent with rates seen in June, and that future confidence has improved slightly. However, it notes a second successive month of staff cuts.
Sarah Bingham, Economist at Markit and author of the UK Construction PMI® said: “July PMI data signalled that the UK construction sector entered the second half of the year in much the same way as the first half was concluded. Rates of growth for both new orders and activity were solid, but remained below long-run trends. Furthermore, employment fell for a second month running.
“Moreover, the subdued level of confidence regarding future business expectations reflects the challenging outlook for the UK economy, and therefore the construction sector. Subsequently, concerns over the stability of growth going forward, for private as well as public sector firms, are likely to hinder spending on construction projects and, ultimately, the expansion of the sector.”
Commenting on the report, David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: “It’s a case of ‘as you were’ for the UK construction sector this month with little change in the rate of activity growth since June. Whilst the sector is battling against poor economic sentiment, high inflation and continued worries in the Eurozone, the sustained growth, albeit at a historically mild pace, has to be seen as a positive, especially compared to the fallback in the manufacturing sector.
“A continued rise in new orders suggests that activity should be supported in the near-term, but confidence regarding potential activity growth for the next year remains relatively subdued. Subsequently, firms are purchasing only to meet current requirements and remain cautious about replacing leaving staff, as the general mood remains uncertain.”
Meanwhile,Laing O’Rourke this week reported a dramatic slump in annual pre-tax profits, from £50m to £26m. Sales fell slightly from £3.5bn to £3.3bn. The company’s European workforce has been cut by 30%. Morgan Sindell has also reported reduced pre-tax profits for the half-year - down by 9% to £16.7m, on revenues up 11% to £1,087m. The company said the market conditions had led to a 0.5% drop in margins.