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Insolvencies remain high, and construction firms are the worst hit: the industry accounted for 17% of all company failures in the year to May 2024. Due to a combination of low profit margins, pre-agreed contracts and inflation, contractors are particularly vulnerable – and that means clients are exposed too. In September, ISG became the most recent firm to file notice to enter administration, ceasing to trade with immediate effect.
If a main contractor becomes insolvent during a project, the implications for the client in terms of budget and programme can be very significant. This is especially the case where there are uncertainties or concerns about the quality of the work delivered to date, which could make a scheme unattractive to a replacement firm.
It’s important to be prepared and have a plan in place when a contractor enters administration and is at risk of insolvency: project managers must be vigilant to the warning signs, and ready to take action to mitigate the risks for their client if a contractor becomes unable to trade.
It’s important to be prepared and have a plan in place when a contractor enters administration and is at risk of insolvency: project managers must be vigilant to the warning signs, and ready to take action to mitigate the risks for their client if a contractor becomes unable to trade.
Nathan Moss, Partner
It’s not always immediately obvious when a contractor is in distress; sometimes it’s a case of piecing together many small signs. A firm in difficulty will try to hide the fact, because once word gets out it may struggle to win new work or attract subcontractors. But the stresses and strains might be apparent on site. Look out for evidence of low morale: high staff turnover, works progressing slowly, a decline in quality, poor health and safety practices, workers using inadequate tools or equipment. Subcontractors may complain that they are not being paid on time, or fail to turn up to site. The contractor may ask for more regular payments or try to bill for works that haven’t yet been undertaken, or materials that aren’t on site. Take note of any warning signs and trust your gut feeling: if it feels like something’s not right, there’s usually a valid reason.
Take note of any warning signs and trust your gut feeling: if it feels like something’s not right, there’s usually a valid reason.
Jason Headington, Senior Associate
It’s essential to raise any concerns at the first signs of trouble. Start an open conversation and ask if there is anything that could be done to help. A typical answer is increasing the frequency of payments – cashflow is king if a contractor is in financial distress. Paying for completed works ahead of contractual timescales may be a worthwhile investment to avoid the much greater costs of the contractor becoming insolvent. But a client should never pay in advance for work that hasn’t been carried out, because it will be impossible to recoup the value if the contractor does enter insolvency. The project manager should carefully weigh up the risks versus the rewards and advise their client accordingly.
When a contractor become bankrupt and folds, the project information they hold may be lost. So, making sure that you have all relevant project information, specifications and certifications on file will save a lot of time and effort later. For example, if there is no certificate to show that the firestopping was signed off, the work may have to be stripped out and reinstated.
When a contractor fails, it happens very quickly and sometimes without warning. You may hear in the media that the administrators have been called in, or arrive on site to find staff leaving. Your number one priority is to secure the site, and make sure it is safe, locked up and ideally with security present. This is partly for reasons of health and safety, and partly to prevent plant, equipment and materials being removed: these are now the possession of the administrator.
Take photos of the status of the works and document progress along with any materials and equipment that have been left behind. Good record keeping will be invaluable for any future claim to the administrator, or against a performance bond.
It may not be possible to prevent a company from going insolvent, but you can support the people you’re working with, at what will be a stressful and difficult time. This approach can also assist in obtaining information and making the handover to a replacement contractor go more smoothly.
The same goes for the subcontractors. For example, paying a firm for work that they have completed to date may ensure they are willing to return to the project when a new main contractor is appointed. They will also be able to provide warranties for the work to date, making the project much more attractive to a replacement contractor.
An administrator has a duty to act in the best interests of those affected by an insolvency, but they may have a long list of parties to work through. The client should contact the administrator as soon as possible or instruct an adviser to do so. They would also be well advised to take legal advice on how best to protect themselves and seek compensation. Acting quickly is essential to minimise collateral damage.
The client may decide to negotiate a new contract with a preferred contractor or retender the project. The project manager should gather all relevant information and engage with the market, being open about the position of the works. They can then provide the client with an informed assessment of the options and agree a way forward.
When a main contractor enters insolvency, effective project management can make the difference between getting the works back on track with minimal disruption, and a job that ends up permanently stalled. Above all, it’s important to act quickly, keep the lines of communication open, and remember the people involved. Being prepared and well organised means you can protect your client, support your team, and make a vital contribution at what is undeniably a challenging time for the industry.
Being prepared and well organised means you can protect your client, support your team, and make a vital contribution at what is undeniably a challenging time for the industry.
Nathan Moss, Partner
Nathan Moss is is a Chartered Surveyor and Certified Project Manager, and leads the Project Management division for Ridge in Bristol. You can contact him at nathanmoss@ridge.co.uk.
Jason Headington is a Senior Associate Project Manager, Chartered Surveyor and Contract Administrator working out of the Bristol office. Jason can be contacted at jasonheadington@ridge.co.uk.
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