‘A significant number of UK practices will fail this year’

Alex Shall of Praxis

I expect a significant number of UK architecture practices will fail this year. Since the start of 2024, I have met with no fewer than three practices to discuss placing them into liquidation. For me this is completely unprecedented.

I can’t name them, but one of these practices was founded in 1983, another in 1990 and the third in around 2010. All had diverse and previously stable client bases and all three have won many awards for their work.

The genesis of this current crisis goes back a decade. Fees have been stagnant for many years while costs have been spiralling.

The barriers to getting work in Europe resulting from Brexit, staff shortages post Brexit, indemnity insurance premiums shooting up after Grenfell, rampant other cost increases in the last two years (particularly software, telecoms and salaries) and many other factors came painfully together in 2023.

Many of our architecture clients emerged from the Covid pandemic dangerously undercapitalised, cash having been used up during 2020 and 2021 simply keeping people employed.

Thus practices have entered the post-pandemic period with more borrowing and far less cash in the bank. Design-led architecture has traditionally been an equity funded business. This means that practices would retain profits in good years to act as a buffer for the years when fees were harder to come by. These buffers simply don’t exist in many practices now.

The coup de grâce is the latent effect of interest-rate increases on private developers and the terrible state of local authority finances. Practice clients have been telling us that work is being delayed or cancelled at short notice – often after they had been led to believe that they were weeks away from starting.

A developer suddenly stopped a project that represented half of a practice’s billing

In one case, a private developer suddenly cancelled a project that would have represented 50 per cent of a practice’s billing for the next six months. Three other projects are now delayed, leaving the practice facing almost no fee income for several months. A few weeks ago it was expecting to be very busy.

In a second case, a client had started stage 4 work on a major school project, the largest project running in their office. With almost no notice, the scheme went on indefinite hold. The local authority procuring the school told the main contractor it could no longer afford to proceed. How bad must things be for a local authority to accept this level of financial waste?

Both of these practices are now contemplating shutting down. They do not have enough confirmed fees for the next two quarters to cover their staff salaries or office running costs. Another longstanding client of my firm has already closed its doors this year.

So what can practices do to protect themselves? Matching staff capacity to confirmed fees will be crucial for the next 12 months. Practices must be ready to consider all options: offering part-time working, looking to second people to other practices, or even redundancies.

Meanwhile, billing and credit control must be as tight as possible. It is crucial that client purchase orders, contracts and fee schedules are up to date and that clients are not handed excuses to delay billing. Overdue fees should be chased actively every week.

Finally, practices must be realistic about promises of work coming in. They must not rely on anything until the contract is signed and the client has accepted the first stage payment invoice.

Despite this, I am optimistic that, at least in the private sector, things will improve as interest rates start to fall.

However practices with a focus on public sector clients may be in for a tough year.

Alex Shall is a partner at accounting and advisory firm Praxis