The number of building and construction firms going out of business is on the increase.

And the downturn in the City is likely to lead to more, warns insolvency specialist Begbies Traynor.

Smaller building and construction firms are among those in London and the South-East feeling the worst of the downturn.

The Department of Trade and Industry said there were 3,873 general company insolvencies in the third quarter of 2002, an increase of 5.2 per cent from a year ago.

A survey by the international research company Experian reveals 372 building and construction companies failed in the third quarter of 2002, a rise of 8.8 per cent on the year.

This year and in 2001 the construction industry suffered the second highest rate of business failure since the 1991 recession.

The business services sector recorded most failures.

According to Begbies Traynor, firms that are going to be badly hit are those that rely heavily on City contracts.

Although new commercial property developments continue to spring up in the City, supply is now outstripping demand.

The Royal Institution of Chartered Surveyors reported a rise in available office space outstripped those recording a fall by 42 per cent.

Nick Hood, senior partner of Begbies Traynor, said: "The City is already suffering from excess office capacity. As the City recession continues and banks and brokers continue to lay off staff in their thousands, overcapacity will get worse and demand for construction will drop off sharply."

He said smaller firms and sub-contractors were vulnerable because they did not have the resources to cope when they were squeezed by their clients or main contractors delaying payments or raising disputes.