Weathering the storm: a guide for employers when navigating contractor insolvency

By Jessica Evans

3 Apr 2025 11 min read

Practical actions an employer should consider during the lifecycle of its construction project to mitigate the adverse impacts of contractor insolvency.

Key takeaways

The UK construction industry has seen a sharp rise in insolvencies in recent years, with several major contractors suffering catastrophic financial collapse. High inflation, increased costs and low profit margins have all increased the risk of insolvency.
Employers should be alive to the signs of contractor financial distress, which include a deterioration in output, reduced workforce and complaints from the supply chain. If insolvency seems likely, preparation is key. Employers should review contract terms and audit the site and materials.
If collapse occurs, it is important to confirm whether formal insolvency proceedings have been entered into. The construction contract will likely include various rights for the employer, but these will only be triggered where the contractor is “Insolvent” as defined in the contract.
Contractor insolvency will frequently result in losses for the employer. Consider the possibility of a claim against the contractor’s insurer pursuant to The Third Parties (Right Against Insurers) Act 2010 but be sure to act quickly before policy limits are eroded by others.

Risks and protections for employers

There has been a sharp and unwelcome rise in the number of insolvencies by UK contractors and subcontractors in recent years. According to the Insolvency Service, over the course of the last decade, the number of construction firms going under across England and Wales has increased by over 147%.

Why, then, is the industry so prone to such financial vulnerability? Stubbornly high levels of inflation have hit the industry hard in recent years, causing significant volatility in the price of certain construction materials. The increased cost of structural steel, for example, peaked at over 91% at one stage. Whilst the prices of most materials have now come down, many still remain far higher than pre-pandemic levels. For many contractors, high levels of inflation have also led to an upsurge in the cost of labour, fuel and machinery. In fixed price contracts, contractors have had little choice but to try and absorb such increased costs, significantly impacting upon their profitability.

Low profit margins are also a contributing factor. A 2021 report by consultants Turner & Townsend found that the UK had one of the lowest margins in the world, averaging just 3.9%. Slim margins mean that some contractors are then ill-equipped to weather unforeseen events, quickly plunging them into severe financial hardship should metaphorical (and, in some cases, literal) storm clouds gather.

Such factors present challenges across the entire industry. Recent high-profile collapses demonstrate that even industry leaders are not immune. In October 2021, major utility specialist, NMCN, filed for administration citing cash-flow challenges as the cause of its distress. In September 2023, tier one contractor, Buckingham, collapsed, blaming “inflationary pressure” as one of the causes of its failure. More recently, in September 2024, ISG – the UK’s sixth biggest construction contractor, with annual revenues of approximately £2.2bn – filed for administration, citing a number of loss-making legacy projects as the primary cause of its demise.

Given the above, employers developing these projects may be asking questions: “How do I protect myself against contractor insolvency?”, “When should I be worried about this?” and “Do I have any options for when things go wrong?”.

This Sector Focus article discusses these questions and highlights the main practical actions an employer should consider during the lifecycle of its construction project with a view to mitigating the adverse impacts of contractor insolvency.

At the outset

It will often be advisable to build in a requirement for the contractor to provide security as part of the wider procurement.

For example, employers should consider seeking a performance bond from their contractors. Generally, bonds will take the form of an insurance backed guarantee under which the surety (i.e. the bondsman) will pay the employer the value of the bond, typically 10% of the value of the contract, should the contractor default on its obligations under the contract prior to practical completion.

In principle, performance bonds can be a highly effective means of mitigating against contractor insolvency. In practice, however, several contractors have reported that the UK bonds market has hardened in recent years. A number of major surety providers have withdrawn from the construction market, meaning some contractors have struggled to secure bonds at an acceptable level of premium.

Where a performance bond is not available – or is otherwise prohibitively expensive in the context of the particular project, noting that contractors will seek to pass on the premium as part of the contract price – employers may instead wish to consider seeking a parent company guarantee (PCG) in its favour. Under a PCG, a parent company will guarantee the continued performance of the contractor under the underlying construction contract and will typically be liable for damages in the event of non-compliance by the contractor.

The degree of protection such a guarantee provides will of course be dependent on the financial covenant strength of the parent at the point of any default. In circumstances where the contractor is struggling, it is not unusual to find that other entities in the group are also suffering financial distress.

During the project

Early warning signs of contractor distress during the course of the project include:

More frequent and/or inflated applications for payment
A sudden deterioration in output or quality
An unexpected reduction of workforce on site
A high turnover of key personnel or unexpected changes in management
Complaints from the supply chain of overdue payments

Employers should remain vigilant. If the contractor is showing signs of financial distress, encourage early and frank discussions.

If the financial challenge is expected to only be a short-term issue, the parties may look to renegotiate the payment terms to manage cash-flow. Any payment arrangements will need to be compliant with the Housing Grants, Construction and Regeneration Act 1996. For obvious reasons, employers should always exercise caution before agreeing any change in the payment profile which has the effect of increasing its overall exposure. Direct payments to the supply chain comes with particular risk as such payments may not necessarily discharge sums owed under the main construction contract, leaving the employer at risk of paying twice.

If contractor insolvency appears unavoidable, the employer should take steps to prepare for this. It is important to check the terms of the construction contract to understand what, if any, pre-emptive action may be taken. For example, where entitled under the contract, the employer should consider conducting an audit of the site in respect of: (i) the progress made; and (ii) the materials stored. In respect of the latter, the employer should categorise materials into: (a) materials which have been paid for; and (b) materials which have not yet been paid for, but are key to the completion/operation of the project.

For the first category, and subject to the terms of the relevant agreement(s), ownership may well have transferred to the employer on payment. If so, it is important that the employer clearly and visibly mark these items as its property to avoid any future insolvency practitioner assuming they belong to the contractor. Whilst there may be obligations on the contractor to have taken such steps, the employer may wish to satisfy itself as to compliance. In respect of the second category, it may be worth initiating discussions with the contractor for their purchase. For both categories of materials, the employer should be mindful of any retention of title provisions in any subcontracts.

Upon contractor’s insolvency

In the event the contractor does indeed collapse, it is important to confirm whether formal insolvency proceedings have been entered into before deciding how to proceed. The construction contract will likely include various rights for the employer, but these will only be triggered where the contractor is “Insolvent” as defined in the contract. Therefore, an accurate understanding of the status of the contractor is vital. To determine this, employers can check the Central Registry of Winding-up Petitions or ask their lawyers to conduct searches.

The employer should proactively engage with the appointed insolvency practitioner. This will hopefully ensure the employer is kept informed on key developments, including, for example, the prospect of any potential sale of the contractor’s business or completion of the project works. This can help the employer decide which options to pursue, particularly in relation to termination (see below).

The employer will need to ensure that the site is properly secured and safe in accordance with the Construction (Design and Management) Regulations 2015. Robust security arrangements should also prevent any disgruntled members of the supply chain removing materials that are rightly owned by the employer.

If the contractor is “Insolvent” as defined in the contract, this will usually grant the employer the right to terminate the construction contract. Should the employer decide to exercise this right, it is imperative that any necessary termination notices are served strictly in accordance with the terms of the construction contract. Purporting to terminate an agreement incorrectly can have significant adverse consequences so it is recommended that all employers seek legal advice before taking any steps towards termination.

Following insolvency

The collapse of the contractor will often result in significant losses for the employer. In such circumstances, it is worth considering alternative recovery strategies. The Third Parties (Rights Against Insurers) Act 2010 enables an employer to pursue the contractor’s insurer directly for an indemnity under a relevant policy of insurance, in the event that the contractor becomes insolvent. Such claims could include (for example) any design-based claims that the employer has or had against the contractor, which may be covered by the contractors’ professional indemnity insurance policy.

Where a contractor enters insolvency, it is important to move quickly to progress any claim, as it is likely that third parties will be following the same strategy and policy limits could be quickly eroded.

Looking ahead: preparing for recovery while managing risk

The key to effectively handling a contractor’s insolvency lies in thorough preparation, timely consultation, and informed and calculated decision-making. This proactive approach will help to ensure that the project can continue with minimal disruption and financial impact. Times have undeniably been tough for many across the construction industry. That said, several economists are now predicting a post 2024 recovery, notwithstanding ongoing economic and geopolitical upheaval. Whether this will be enough to stem the rising tide of construction firm insolvencies, will remain to be seen.

The views expressed in this article should not be taken as legal advice.