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Price increases and a shortage of skilled workers
are currently making things difficult for the booming construction industry
Photo: Alexander Heinl/ dpa
Germany is building more than ever before.
Due to the high demand and full order books, the Main Association of the German Construction Industry and the Central Association of the German Construction Trade are expecting a nominal increase in total sales of 5.5 percent to 151 billion euros this year.
Adjusted for price, this is an increase of 1.5 percent.
But in addition to the order situation, the number of insolvencies in the construction industry has also recently increased.
In November 2021, the latest figure published by the Federal Statistical Office, insolvencies in the construction industry rose by more than 20 percent compared to the previous year, which represents the strongest increase in the last 20 years.
Most insolvencies in October 2021 were in the construction industry with 193 cases.
In October 2020 there were 170 bankruptcies.
Why is there now a wave of bankruptcies in the construction industry?
Are bankruptcies a cause for concern?
And what should builders consider now?
Higher prices are a burden for many smaller companies
The supply bottlenecks are probably the most important reason for the increasing number of corporate insolvencies in the industry.
They put a direct strain on many companies: although they could hardly save themselves from orders, numerous companies had to register short-time work because they lacked the necessary materials and were therefore unable to employ their employees.
Indirectly, the delivery bottlenecks led to a sharp rise in prices.
Producer prices for individual building materials such as wood and steel rose on average in 2021 more than ever since the survey began in 1949. Timber, for example, rose by 61.4 percent, solid structural timber by 77.3 percent compared to the previous year's average, the purchase prices of reinforcing steel increased by more than 50 percent.
"Because some of the construction companies had previously concluded the contracts with their customers at much lower prices, profits plummeted," says
Andreas Rees
, chief economist for Germany at UniCredit Bank in Frankfurt am Main.
The traditionally low equity ratios in the construction industry increased the pressure on many construction companies.
The industry average for the equity ratio is less than 20 percent, well below the average for other industries of 30 percent.
"This applies in particular to smaller companies in the construction-related trades, which were increasingly founded in the boom years," says Rees.
Improvement is not in sight
What happens now?
Before the war in Ukraine, the bottlenecks decreased somewhat, but remained at a high level: According to a survey by the ifo Institute, 31 percent of building construction companies reported delivery problems in December, compared to 25 percent in January.
In civil engineering, 20 percent of those surveyed had to work with significant bottlenecks.
It remains questionable whether the situation will drastically worsen again with the war.
Regardless of this, the central association of the German construction industry still considers the development of material costs to be worrying.
"Price development is a very serious issue," says
Andreas Geyer
, head of the association's economy department.
The purchase prices for construction companies are currently rising rapidly.
In January 2021, the Federal Statistical Office reported a price increase of 1.9 percent for construction work, in June 2021 it was 6.1 percent and in November 2021 11.8 percent.
"If the prices continue to develop like this, the construction companies have increasing pressure to pass on the prices," says Geyer.
Construction companies demand subsequent costs
Some construction companies are already trying to demand money afterwards, observes
Florian Becker
, Managing Director of the Association of Builders' Protection.
"Even if the contracts don't allow it, a whole range of companies are trying to do it."
On average, the additional payment claims would be between 3000 and 6000 euros.
For builders, the insolvency of a construction company is often a disaster.
Becker therefore recommends obtaining business information about the company employed.
In addition, they should not pay in advance, but only pay when the service is rendered.
"The shell will be paid for when the shell is finished."
Especially since another cost trap is imminent: "In addition to the price increases, we currently have an acute shortage of skilled workers. This often results in construction delays," says Becker.
A delay of six to twelve months is already normal.
If the agreed construction time expires, builders have a huge claim for damages.
But that doesn't happen if the company files for bankruptcy first.
Builders would then only be reimbursed between four and six percent of their costs.
And then another problem often follows: construction companies are reluctant to get involved in unfinished construction projects.
The number of all corporate insolvencies is falling
Are the rising numbers of bankruptcies in construction now a cause for concern?
At the Central Association of the German Construction Industry, the answer is no.
"We are not in a crisis in construction," says Andreas Geyer.
The reason for the increase is, among other things, the temporary suspension of the obligation to report insolvency due to Corona.
The industry has seen more dramatic times.
In the early 2000s, some 5,000 construction companies had to file for bankruptcy each year.
Around 1,000 construction companies went bankrupt in 2020 and 2021.
However, the association does not give the all-clear: “But we take the current figures seriously and continue to keep an eye on them.”
Especially since the insolvency situation is currently easing outside of the construction industry: Although the special regulations on insolvency during Corona have been gradually abolished since May 2021, the number of corporate insolvencies overall has fallen.
The situation is better than feared at the beginning of the pandemic, says UniCredit chief economist Rees.
"The tsunami of corporate bankruptcies that some people predicted following the outbreak of COVID-19 has not materialized."
According to the Federal Statistical Office, a total of 1094 companies filed for bankruptcy in Germany in November 2021.
Although that was 4.6 percent more than in the same month last year, this value is still low compared to pre-pandemic times.
It was 22.6 percent below the reported bankruptcies in November 2019.
In construction, numbers are likely to stay high for a while longer, Rees predicts.
Simply because of the bottlenecks that persisted until a few months ago and the associated problems for companies.
Since the number of insolvencies processed by the district courts is a classic lagging indicator, it could still be some time before the number of corporate insolvencies in the construction industry goes down.
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