From Crisis to Contingency: Safeguarding against Insolvency

Insolvency remains an established and real risk within the construction industry in recent years. According to the Insolvency Service construction companies accounted for 17.2% of all insolvencies in England and Wales in May 2025, and in the year to May 2025, the industry experienced 4,056 total insolvencies. While this represents a decrease of 5.8% compared to the figure recorded in the year to May 2024, it remains 26% higher than the total figure recorded pre-pandemic in 2019. In Scotland, there were 23 construction company insolvencies in June 2025, accounting for 21.9% of all insolvencies recorded in June 2025.

The economic landscape and increasing rates of insolvency have forced housing associations to rethink their relationship with SME housebuilders and contractors and 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 the construction industry is no stranger to difficulty, there are some well-established trends (and some new faces) placing pressure on construction companies in an already highly competitive sector. These include inflationary pressures, increased labour costs, supply chain delays and a general labour shortage, COVID-19 and the consequences thereof, martial shortages, and global events such as the war in Ukraine (it remains to be seen what the impact of the US tariffs will be. . .)

These trends squeeze budgets and stretch profit margins, putting construction companies under immense pressure. Among those particularly affected are sub-contractors and suppliers who remain squeezed by the impact of inflationary pressures and increased labour costs compounded by the slowdown in the housing market. This problem is further compounded by high finance costs in an industry with traditionally thin profit margins and cash flows, making construction players particularly vulnerable to late payments.

While it is impossible to eradicate the risk associated with insolvency, there are some protections which can be sought to help mitigate the risk as set out below: -

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. PBAs protect members of the supply chain from nonpayment due to the contractor's / sub-contractor insolvency, as the employer maintains adequate funds in the account to cover work in progress and other project commitments.
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.
Policy Cover	The employer could take out cover to protect against insolvency, such as the NHBC Buildmark cover, which provides comprehensive protection for homeowners and developers against various risks, including insolvency of the builder. This cover offers a maximum of £100,000 cover in cases of insolvency before completion.
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).