Construction insolvency exposes deep structural weaknesses

In 2019, a year after the collapse of Carillion, major lessons could be drawn from that high-profile failure. At that time, Carillion stood as the UK’s second-largest construction and services group, employing around 40,000 people, generating more than £5 billion in revenue, and holding a vast portfolio of government-mandated public sector contracts. Its downfall was both a shock and a warning to the entire sector.

Five years on, the industry is once again grappling with the repercussions of another major corporate failure, this time ISG. Like Carillion, ISG operated at a substantial scale, with multi-billion-pound turnover and more than 2,000 employees engaged in prominent, large-scale public and private sector schemes. Its insolvency marks the most significant collapse since Carillion in 2019, yet ISG is far from the only major name to have disappeared in recent years. Other sizeable businesses, Buckingham Group, Osborne, Henry Construction and Inland Homes — have also entered insolvency, further weakening the sector’s already fragile landscape.

The construction industry continues to carry a disproportionate share of corporate failures across the economy. In the twelve months to June 2025, construction accounted for approximately 17 per cent of all insolvencies across all sectors. This pattern is not new; insolvency has been a persistent challenge for construction businesses for several years, and warnings about the sector’s vulnerability have been repeatedly borne out.

Underlying pressures

Multiple structural and economic issues have converged to place prolonged strain on construction firms. Persistently high interest rates have suppressed buyer demand for new-build housing. Consumer appetite in the wider market remains subdued. Although inflation has eased in some areas, the cost of materials has stayed elevated, and labour conditions remain difficult as contractors continue to struggle with skills shortages, wage pressures and the ongoing challenge of recruiting specialised workers.

Civil engineering activity has contracted sharply, and non-housing construction has also stagnated. Recent data even shows that UK cement production has fallen to its lowest level in 75 years — a stark indicator of the reduction in workload across key subsectors.

A recent survey by The Construction Index, reflecting the views of senior commercial directors, highlights the breadth of difficulties facing the industry. High-risk residential and commercial developments have been slowed by expanding regulatory obligations, including stricter energy-efficiency requirements and the ongoing implementation of the building safety regime, which many commentators believe is still not functioning efficiently. Public sector schemes are encountering delays or funding constraints linked to wider economic conditions. Large logistic facilities and data centre projects face uncertainty around their future viability. In contrast, utilities work — particularly in water and energy — is accelerating, creating intense competition for limited specialist resources.

It would, however, be misleading to portray the industry as uniformly bleak. Headline figures show turnover up by 7.3 per cent year-on-year, with pre-tax profits also improving. Margins remain thin but have risen modestly from 1.9 per cent to 2.4 per cent. Larger, well-capitalised contractors appear better placed to weather political and economic turbulence. They typically have greater financial resilience, more flexibility to adjust commercial strategy, and a stronger capacity to adopt new technology to drive efficiency gains.

It is further down the supply chain — among smaller contractors and subcontractors — that the real stress is most visible. On many projects, payment cycles stretch to ninety days from the submission of a payment application to actual receipt of funds. During that period, the employer retains the ability to issue a pay-less notice, withholding part or even all of the payment. If that occurs, a dispute often follows, and resolution may take up to a further three months. During this time, the contractor must continue delivering work and meeting costs while remaining significantly out of pocket.

Overlay these cash-flow pressures with high inflation on materials and labour, plus a long-standing reluctance within parts of the sector to adopt modern processes, digital tools, or improved governance frameworks, and it becomes clear why so many companies are facing acute financial distress.

The building safety regime

The introduction of the Building Safety Act 2022 (BSA) has also brought substantial consequences for residential construction. The Act created a new “gateway” system for securing regulator approval both for new high-risk residential buildings and for remediation works on existing buildings. This regime, however, has been beset by widely reported delays, limiting progress and affecting productivity across large swathes of the residential market.

The National Audit Office recently assessed progress since 2019, when the Ministry of Housing, Communities and Local Government (MHCLG) allocated £600 million to support the remediation of high-rise buildings with unsafe cladding. According to the NAO, most remediation work on the tallest buildings — those above 18 metres with the most dangerous forms of cladding — has now been completed or is approaching completion.

But the remaining workload is extensive. Based on MHCLG’s own projections, the removal of unsafe materials from buildings over 11 metres will not be completed until 2035. To accelerate progress, the government has set out new targets and tougher measures aimed at increasing compliance and penalising slow or non-responsive parties.

A further emerging issue is the potential scale of liability arising from Building Liability Orders (BLOs). Under section 130 of the BSA, the High Court may impose liability on “associated” companies if it is just and equitable to do so — effectively piercing the corporate veil. BLOs can apply not only to companies directly responsible for defective works but to other group entities associated with them. The provision also interacts with extended limitation periods under the BSA and the Defective Premises Act (DPA).

The original policy intent behind BLOs is clear: to prevent developers avoiding liability by operating through special-purpose vehicles that are wound up after project completion. Yet, because of the way the legislation is drafted, the scope of BLOs may reach significantly further than initially anticipated. The law in this area remains nascent, and there is little jurisprudence to provide clarity or constrain the potential breadth of liability.

Some groups may now face scrutiny for projects completed up to three decades ago, or where companies dissolved long ago are being revisited under retrospective limitation rules. In one recent matter we were involved in, an internal assessment showed that potential exposure across the group could reach several hundred million pounds. Unsurprisingly, such liabilities would threaten the solvency of the group if they crystallised.

For companies that identify potential exposure, now is the time to evaluate restructuring options — including restructuring plans — to mitigate the consequences of large BLO liabilities materialising. Any proposal would need to provide meaningful compensation to claimants, particularly individual leaseholders, and may require offering them a proportionate share of any restructuring surplus. Given the size and diversity of the creditor class, a cross-class cram-down would likely be necessary. Robust consultation, transparency, and fairness in the plan’s formulation would be essential.

It is entirely feasible that such a restructuring could be implemented. If not, the sector may see a further wave of failures. Indeed, we have already witnessed Ardmore Construction Limited enter administration, explicitly citing BSA liabilities as the primary cause.

Recovering value following insolvency

From the perspective of creditors and insolvency practitioners seeking to recover value post-collapse, contractual retentions often provide the quickest wins and are usually pursued first. More complex “final account” disputes require a more nuanced approach, particularly given ongoing developments in case law concerning whether an administrator or liquidator can refer a construction dispute to adjudication and whether any resulting award can be enforced against a solvent counterparty.

This area reflects a long-standing tension between the Housing Grants, Construction and Regeneration Act 1996 and the insolvency regime. Where a claimant in liquidation pursues adjudication and the defendant asserts a cross-claim capturing insolvency set-off, courts have historically declined to grant summary judgment enforcing the adjudicator’s decision. Instead, the appropriate venue becomes the Business & Property Courts, where the defendant may appeal the liquidator’s rejection of its proof of debt. This principle was set out in the Court of Appeal’s 2000 ruling in Bouygues v Dahl-Jensen.

In Bouygues, the claimant company entered liquidation the day before the adjudicator’s decision was issued. At the enforcement hearing, insolvency set-off was not argued, leading the Court of Appeal to grant summary judgment but impose a stay of execution until the defendant had the opportunity to appeal in the appropriate court.

In 2009, Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd held that although a net balance under insolvency set-off was assignable, the claim could not be adjudicated once insolvency intervened. The latter part of that ruling was overturned by the Court of Appeal in 2019 and then by the Supreme Court in 2020 in Bresco Electrical Services Ltd v Lonsdale.

The Supreme Court confirmed that an insolvent company retains the jurisdictional right to adjudicate despite insolvency set-off. Lord Briggs rejected the argument that such adjudications were futile, noting that adjudication plays an important role in dispute resolution irrespective of enforceability. Enforcement, however, must be considered case by case. The court emphasised that where enforcing an adjudicator’s decision may deprive the solvent counterparty of effective security for its cross-claim, summary judgment should be refused.

This approach was reinforced by the Court of Appeal in John Doyle Construction Ltd (in liquidation) v Erith Contractors Ltd (2021). The court made clear that it would be exceptional for an adjudication award obtained by an insolvent company to be summarily enforced. The judgment reiterated that insolvency set-off forms an intrinsic part of the claim itself, not merely a discretionary consideration. The court stated plainly that an adjudicator’s provisional assessment cannot substitute for a final determination of the true net balance.

Nevertheless, enforcement remains possible where there is no real prejudice to the solvent party. To achieve this, the insolvent estate would need to demonstrate access to sufficient funding, comprehensive ATE insurance, and undertakings ensuring that any recovered sums would be ring-fenced pending final determination. Additional security, such as bonding or third-party guarantees, may also be necessary.

A recent illustration of these principles can be seen in Malin Industrial Concrete Floors Ltd v VolkerFitzpatrick Ltd. Malin secured an adjudication award of £59,950 plus VAT, interest and associated fees. Shortly afterwards, it entered administration. VolkerFitzpatrick alleged defective works and claimed to have spent £66,000 on remedial measures but failed to adequately particularise its counterclaim. Malin sought summary judgment. The court granted it but stayed enforcement, giving the defendant three months to provide evidence substantiating its alleged cross-claim. The case serves as a warning: solvent counterparties cannot ignore adjudications simply because the claimant is insolvent. If they do, they may face judgment with limited time to compile a viable defence.

Looking ahead

For the industry to achieve lasting stability, broader systemic reform is necessary. Several areas require sustained attention:

• Payment practices:
Debate around payment terms and the regulation of contractual retentions has persisted for years. The government’s 2020 consultation showed that more than 80 per cent of respondents believed the current framework was inadequate. Reform remains essential if contractors and subcontractors are to maintain financial resilience.

• Procurement:
Procurement methods have for too long emphasised the lowest bid, encouraging a race to the bottom that compresses margins and places intense strain on the supply chain. Shifting emphasis towards value, deliverability and long-term sustainability would help rebalance project economics. Government — as one of the largest employers of construction services — has a critical role in driving this cultural shift.

• Innovation:
Investment in new technologies and more efficient processes is vital to improving performance and increasing margins. Larger contractors have already begun moving in this direction, but adoption across the wider supply chain remains uneven.

• Strengthened contract management:
Firms are now demonstrating increasing care in the way they manage contracts throughout the project lifecycle. Enhanced due diligence and improved early-warning mechanisms will be key to identifying and responding to distress at an earlier stage.

• Funding:
Construction represents between 8 and 10 per cent of the UK’s GDP. Continued access to funding is therefore vital. Recent growth in asset-based finance and alternative lending has helped, but more support and broader access to finance would bolster the sector’s overall resilience.

Conclusion

Collectively, these developments highlight the considerable challenges currently confronting the construction industry amid an era of high-profile corporate failures, evolving regulatory requirements, and persistent structural vulnerabilities. 

Concurrently, insolvency practitioners and creditors must navigate the intricate relationship between construction adjudication and insolvency law, assessing each dispute within the context of cash flow considerations, set-off regulations, and enforcement practicalities. 

In this environment, the imperative for systemic reform, in payment practices, procurement protocols, technological integration, contract management, and financing access, has become increasingly apparent. Without meaningful, sustained improvement across these dimensions, the sector faces the continued risk of recurring distress, further insolvencies, and prolonged instability throughout the supply chain.