ISG, the UK’s sixth biggest construction contractor, has filed for administration. With annual revenues of approximately £2.2bn and involvement in a reported 69 live government projects, this collapse is likely to have wider implications for the industry.

ISG’s insolvency represents the largest collapse of a UK construction giant since Carillion in 2018. Carillion’s demise, which delayed some projects by up to 7 years and led to spiralling cost increases, highlights the importance for employers to act swiftly and carefully once a contractor becomes insolvent. With this in mind, we consider some practical considerations for employers when faced with contractor insolvency.

1. Confirm that the Contractor is in Administration

If the Contractor has not entered into formal administration, this could affect your rights and remedies under existing contracts. To find out a Contractor’s administration status, you should check The Central Registry of Winding-up Petitions or ask your lawyer to conduct searches.

2. Contact the Administrator

Proactive engagement with the Administrator will hopefully ensure you are kept informed on key developments, including, for example, the prospect of any potential sale of the Contractor’s business.

The Administrator may be able to provide an early indication as to whether there is any prospect of the Contractor performing its remaining obligations under the construction contract. This can help you decide which options to pursue, particularly in relation to termination (see further below). 

3. Site Protection

It is important to secure the site - both for health and safety reasons and also to prevent any disgruntled members of the supply chain removing materials that you have paid for. You should always check the construction contract first to ensure you are entitled to do this.

4. Site Inspection

You should carry out an initial inspection so that you have an accurate record of the works completed by the Contractor. Following this, it is sensible to carry out a full audit of the works, unincorporated materials and contractor’s equipment, with supporting evidence such as videos and photographs with time and date stamps.

5. Off-Site Materials

You may choose to conduct an audit of any materials stored off-site to confirm (i) which have been paid for; and (ii) which have not yet been paid for, but are key to the completion/ operation of the project. 

In respect of the first category, and subject to the terms of the relevant agreement, ownership may have transferred on payment. If so, it is important that you clearly and visibly mark these items as your property to avoid Administrators assuming they belong to the Contractor. 

In respect of the second category, this is likely to require discussions with the Administrator. It may be possible to agree terms for their purchase. 

6. Sub-Contractors and Suppliers

You should locate copies of any subcontracts, supply contracts, appointments and collateral warranties. It is recommended that you seek legal advice to help decide on the next course of action as there can be lots of complexities in this area. For example, paying the subcontractors directly can risk you paying twice for the same work, but this needs to be weighed against the need to keep the subcontractors on board to complete the project.

Also, whilst collateral warranties may allow you to ‘step into the shoes’ of the Contractor, sometimes this is conditional on payment of any outstanding sums. Therefore, it is important to clarify what (if any) sums are owed by the Contractor prior to any attempts to exercise step-in rights.

7. Payments

You should establish the sums paid to the Contractor, including any retention monies. This will involve careful examination of certified sums and any Pay Less Notices.

8. Terminate the Construction Contract?

Insolvency may be a trigger for termination of the construction contract. However, this is a complex area. Purporting to terminate when you have no contractual right to do so can have significant adverse consequences. Assuming you have the right to terminate,  it is important that any termination notices are served strictly in accordance with the terms of the agreement. It is therefore recommended that you seek legal advice before taking any steps towards termination.

This article was written by Jessica Evans and Jacob Hall.

If you have any questions or would otherwise like to discuss any issue raised in this article, please contact Jessica Evans or our Construction Disputes team.