Insolvency has been and continues to be a consistent cause for concern within the construction industry in recent years. According to the Insolvency Service construction companies accounted for 16.3% of all insolvencies in England and Wales in December 2024. In the year to December 2024, the industry experienced 4,032 total insolvencies. While this represents a decrease of 8.1% compared to the figure recorded in the year to December 2023, it remains 25.3% higher than the total figure recorded pre-pandemic in 2019. In Scotland, construction companies comprised 14.7% of all insolvencies recorded in January 2025.
Each construction company has undoubtedly faced its own unique challenges and there are a few commonalities causing pressure to those working in the construction industry. Well known trends include inflationary pressures, increased labour costs, supply chain delays and a general labour shortage. In an already highly competitive sector, these trends squeeze budgets and stretch profit margins, putting construction companies under immense pressure. In addition, construction companies in recent years have been impacted by and contend with the consequences of COVID-19, material shortages, and global events such as the war in Ukraine.
The economic landscape requires companies to be resilient and to continue to remain aware of the warning signs of impending insolvency in order for contingency plans to be put in place wherever possible. Insofar as employers are concerned, it is more important than ever to ensure that parties are comfortable with the financial covenant and risk profiles of construction companies when awarding contracts.
While it is impossible to entirely eradicate the risk associated with contractor insolvency, there are some protections which can be sought by employers to help mitigate the risk - for example, by ensuring a full suite of collateral warranties are granted by each of the key sub-contractors, utilising project bank accounts, procuring vesting certificates/ off-site materials agreements where appropriate or by requiring retention bonds or advance payment bonds from contractors. These mitigation techniques are set out in more detail below:
| Collateral Warranties | A collateral warranty is a contract under which a party involved in a project warrants to a third-party beneficiary that it has fulfilled or will fulfil its obligations under the relevant underlying building contract, subcontract or professional appointment. Collateral warranties may also contain 'step-in' rights which allow the beneficiary to 'step into' the shoes of the insolvent or defaulting party. A full suite of collateral warranties in favour of the employer from those that sit underneath the main contractor (e.g. subcontractors and subconsultants) will provide the employer with a second layer of protection in the event of main contractor insolvency. |
| Project Bank Accounts (PBAs) | Project Bank Accounts (PBAs) are ring-fenced bank accounts whose sole purpose is to act as a channel for payment on construction projects ensuring that payments are made directly to all members of the supply chain on contractually agreed dates. They are typically used on public sector projects. PBAs protect members of the supply chain from nonpayment due to the main contractor's insolvency, as the employer maintains adequate funds in the account to cover work in progress and other project commitments. |
| Vesting Certificates/Off-Site Materials Agreements | These agreements provide for transfer of ownership of materials to the employer upon payment, even when the materials are still off-site. Without such an agreement in place ownership of materials would typically transfer to the employer only when the materials are incorporated into the works. These agreements protect the employer from losing rights to materials if the contractor becomes insolvent before incorporation or delivery. However, it's important to ensure that these materials are properly identified, stored, and insured. |
| Retention Bonds | These are bonds procured by contractors in favour of the employer which allow the employer to make all payments to the contractor, as they fall due under the building contract, without retention. These facilitate the contractor having better cash flow while still providing the employer with the necessary security that the contractor will correct any defects as required during the defects liability period. They can be particularly useful in long-term projects where cash flow management is critical. |
| Advance Payment Bonds | Where the contractor requires an advance payment to commence the works, an employer can require the contractor to procure an advance payment bond in favour of the employer as security for the advance payment. These bonds are granted by third party sureties or banks and provide security to the employer if the contractor (or supplier) fails to deliver as required under the building contract (or supply agreement). In that event, the employer is able to call on the bond for repayment of the amount paid in advance (to the extent such has not already been repaid). |
If you would like any further advice on how to mitigate therisk of contractor insolvency, please contact one of our construction lawyers.
