Article

Collapse of ISG and Contractor Insolvency – another stark warning to the construction industry1 October 2024

This brief update covers ISG’s collapse and formal entry into administration on 20 September 2024. News of ISG’s insolvency has, unsurprisingly, received significant media attention and commentary from the wider industry, with comparisons being drawn to the high-profile collapse of Carillion six years ago.

This is of course deeply troubling news for the industry and is likely to have profound knock-on effects for contractors, subcontractors and further down the supply chain.

Background

News of ISG’s financial difficulties and potential collapse was leaked over the course of the last few weeks. The industry’s suspicions were confirmed on Friday 20 September when ISG formally announced that it had filed for administration, appointing EY as its administrators.

< Back to insights hub

Key contacts

Theresa Mohammed

Partner London

"The impact of ISG’s collapse cannot be understated and raises significant questions about the construction sector as a whole and its underlying business models."

As one of the biggest contractors in the UK with responsibility for over £1bn worth of public sector, government contracts, the impact of ISG’s collapse cannot be understated and raises significant questions about the construction sector as a whole and its underlying business models.

Some of ISG’s most prominent projects included:

the construction of the Velodrome for the London 2012 Olympics;
the fitting out of Google’s new headquarters at King’s Cross;
the expansion of HM Prison Grendon; and
the conversion of Regents Quarter in London into a life sciences campus.

What went wrong?

There appear to be several reasons for ISG’s collapse, ranging from its more immediate inability to secure funding and failed attempts to secure a buyer to legacy financial difficulties from the pandemic and substantial involvement in loss-making contracts, leading to cash flow issues. Perhaps the most significant factor, and indeed that which has received intense industry scrutiny, is ISG’s flawed business model and very narrow operating margins.

It has been widely reported that ISG’s operating margin was roughly 2%, with the majority of its work being subcontracted. In its 2022 annual report, ISG’s turnover was £2.18bn with a pre-tax profit of £11.5m. Whilst such levels are certainly reflective of the construction industry more broadly, maintaining such a narrow margin was clearly not sustainable for ISG, especially given that its executive directors were paid very generously. Indeed, in ISG’s 2022 annual report, its highest paid director (presumably its CEO) is stated to have received remuneration of £2.5m.

"We believe a number of lessons can be learnt so as to avoid future insolvencies in the industry."

Wider implications for the construction industry

ISG’s collapse leaves the construction industry in a fragile and precarious state. The future of many projects has now been left in doubt, subcontractors’ risk not being paid and some 2,200 workers have been left unemployed. Despite this, we believe a number of lessons can be learnt so as to avoid future insolvencies in the industry.

For example, contractors should seek to maintain a system of robust financial controls and effective cash flow management – avoiding what has been described as financial deviance or risk taking. There are a variety of electronic payment platforms or project bank account systems that are being proposed in the sector that could facilitate prompt payment and ring fence funds against insolvency. Regular financial audits should be conducted as well as a detailed review of existing profit margins to ensure that such margins are in fact sufficient to cover and account for any unexpected events, non-payment or costs that may occur during a construction project.

In terms of security, it is also worth carefully considering the terms attached to and the value of financial instruments like bonds and making sure the commercial benefit of them is not overstated.

Contractors and subcontractors might also be advised to review their contractual safeguards and payment mechanisms to ensure all payments are structured effectively, in turn mitigating against the risk of unnecessary and protracted contractual disputes. In the recent Court of Appeal decision of Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962, the Court highlighted that any failure to make payments on time and in strict compliance with payment schedules may be treated as a serious breach under the contract and as a cause for termination. For further analysis of the Providence Building Services Ltd v Hexagon Housing Association Ltd case, please see this link to our recently published insight article.

"Contractors may wish to diversify their client base and spread risk across a range of both public and private sector projects."

In addition, given ISG’s strong reliance on public sector projects, including the construction of schools, police stations and prisons, contractors may wish to diversify their client base and spread risk across a range of both public and private sector projects.

Conclusion

In summary, ISG’s collapse serves as a stark warning to those operating in the construction industry and should be treated as a learning opportunity to mitigate against future insolvencies. Clearly a combination of factors led to ISG’s collapse and its overarching business model does not appear to have been designed for sustainable, long term financial success.

We are planning to prepare a broader insight piece into contractor insolvency across the industry and the core lessons to be learnt from ISG’s collapse.

Should you have any questions or require further insight into how this development may impact your own business or ongoing projects, please do not hesitate to reach out to the authors or your usual WFW contact.

London Trainee William Stewart also contributed to this article.

< Back to insights hub