Research into the financial health of small and medium-sized contractors by accountants Baker Tilly and financial monitor Company Watch reveals the sector is growing ever more reliant on the support of banks.

The survey of recently filed company accounts revealed that over one in six contractors would not be able to pay off their immediate debts if required to do so by their creditors.

This leaves a huge swathe of the industry in an extremely vulnerable position, having to count on full backing of the banks.

Profits are falling fast among contractors turning over £2m-£25m, and the accountants predict one in 39 of these firms are likely to fall into financial distress over the next 12 months.

Almost one-quarter of construction contractors saw pre-tax profit plummet by half or more during 2011, with 41% recording a fall of between 10-20%.

It was a similar story for sub-contractors, where 25% saw profitability collapse by more than 50%, and 38% saw a fall of between 10-20%.

The picture was better for sales with just over a quarter of firms reporting sales declines of at least 10% last year compared to around 40% of firms the year before.

“The fact that profits are falling at a faster rate than sales suggests that companies are being hit hard by a double whammy of rising costs and falling margins, as they face an ever more desperate fight for sales,” said Mark Wilson, partner at Baker Tilly Restructuring and Recovery.

“Cutting margins to the bone might win more work in the short term, but it is very risky and in the long term it is counter-productive, as shown by the drastic fall in profit levels.”