High interest rates can increase borrowing costs, put pressure on cash flow and reduce the profitability of fixed-price contracts. Shaun Barton, Insolvency Adviser at Real Business Rescue, explains how this impacts small construction companies and what builders can do about it.
When interest rates rise, even small construction businesses feel the pinch. Higher rates make borrowing more expensive, downgrade the value of contracts already signed, and dampen the appetite of clients to commission new work.
The effect is felt from both directions - your clients have less spare money, so fewer of them are ready to commit to an extension, a renovation, or a new build, while your own costs for materials, plant hire, and subcontractor rates go up at the same time.
By spotting this early, you can price a job accordingly and budget responsibly – otherwise, you could end up paying out more than you planned for. By understanding how interest rate changes impact you, you can forward plan and avoid any unexpected costs, rather than being caught out partway through a project.
What do high interest rates mean for builders?
When a cost of living crisis happens, interest rates usually rise as a result, so finances are tight all around, for the business, clients, and suppliers alike. It's rarely just one part of the business that feels it; borrowing, hiring, supplies, and the contracts you've already signed can all be affected at once.
Hiring – With outgoings rising all around, workers and subcontractors may expect you to bring their pay in line with the cost of living. While understandable, it adds pressure to your own margins, particularly if you priced a job before factoring in higher wages. Skilled subcontractors can be in short supply at the best of times, so builders often have less room to push back on rate increases without risking the working relationship.
Borrowing – If you rely on a loan for a van or a digger, or short-term finance to cover a gap while you wait to get paid, higher interest rates mean that borrowing costs you more. If you have a fixed-rate loan, you're protected until it's time to renew. If you're on a variable rate, your next repayment will probably jump in price, which can catch you out if you haven't budgeted for the change.
Supply chain – Suppliers struggling to absorb higher costs may increase their prices to remain profitable. You may switch suppliers as a result, absorb the cost, or raise your own prices. If you are mid-project, your options may be limited to maintaining the same standard of materials throughout, which can leave you covering the difference yourself. Longer lead times on materials can add to the problem.
Jobs pipeline – Jobs booked in may be rescheduled or timelines extended to allow clients extra time to raise money. Jobs may also drop off if customers can no longer afford to borrow money due to higher interest rates.
Fixed-price contracts – A price you agreed to several months ago based on the cost of borrowing, materials, and labour at the time may no longer be profitable. If those costs go up before the job is finished, a comfortably profitable contract can quickly turn loss-making, with no room for negotiation. This is why it's worth reviewing how far ahead you're prepared to fix a price, especially on longer jobs where costs have more time to move before completion.
How can builders protect against high interest rates?
When interest rates rise, suppliers often turn up the heat on late payers, which means less flexibility when negotiating payments. Quoting for a job becomes harder as costs may increase in the interim. All while retentions are held back until the job's fully signed off, which means tighter cash flow at exactly the point you need it most.
A few practical steps make these pressures easier to handle:
- Add a rate-review clause into your long-term contracts.
- Keep fixed price offers for shorter.
- Price in some room for costs going up, rather than quoting based on today's prices alone.
- Ask suppliers and subcontractors for payment terms that don't leave you out of pocket for longer than you need to be.
- Budget for clients taking longer to say yes – if they're watching their own borrowing costs, they may need more time before committing to a job.
- Get advice early if a job stops being profitable partway through while there's still time to act.
It's good practice to check your pricing, your contract terms, and how you're borrowing money throughout the year, regardless of how high or low interest rates are. Building this into your routine, rather than only reacting when rates move, makes each pressure easier to manage over time.
What help is out there for building companies?
The higher the interest rate, the tighter the squeeze, so learning how to keep finances in check is a valuable lesson for every builder. If your company is experiencing ongoing financial difficulty, don't wait until insolvency becomes unavoidable. Understanding the warning signs early can leave more options available. Read our guide to recognising the warning signs of insolvency and the options available to building companies, then speak to a licensed Insolvency Practitioner if you're concerned.
Authors
Shaun Barton
Shaun Barton is a Partner at Real Business Rescue, a trusted licensed insolvency practice supporting limited company directors nationwide. As an Insolvency Adviser with over 30 years’ experience, Shaun has expertly guided hundreds of distressed construction directors with company closure and rescue. He holds the Certificate of Proficiency in Insolvency (CPI), and he played a leading role in securing the Customer Service Excellence (CSE) award.
