Late or no payment, tight profit margins, materials and labour shortages, and the prospect of tax changes for businesses continue to put economic pressure on businesses across the construction sector. It is no surprise, therefore, that the construction industry suffered more insolvencies than other sectors over the last year.

The Insolvency Service reported on 19 November 2024 (see section 2.4 of the report) that the construction sector experienced the highest number of insolvencies in the 12 months to September 2024: a total of 4,264 which amounted to 17% of the total cases where the industry was known. That is 4,264 businesses whose owners, directors, employees and trade partners have all had their working and personal lives disrupted.

Be vigilant: look out for the warning signs of construction insolvency

A single insolvency in the supply chain can soon disrupt cash flow and project programmes, cause expensive disputes and undermine the goodwill built up between longstanding trading partners. Now, as much as ever in recent years, those involved in the construction supply chain must remain vigilant to ensure any signs of financial difficulties are spotted early.

Why is it important to identify a trading partner's financial problems early?

Quite simply, it is more difficult (sometimes impossible) to recover money from an insolvent business. Acting swiftly on the warning signs can mean there is more scope to support those trade partners at risk of insolvency, to protect ongoing projects from delay and to avoid disputes and extra costs.

The checklist below sets out warning signs to look out for – but these do not necessarily mean that a business is insolvent. Rather, they paint a broad picture of the financial health of a business. Insolvency or the risk of insolvency can lead businesses to change their commercial approach (for example, to payment obligations). It can also change its employees' attitudes and behaviour when carrying out its contractual responsibilities. They might, for example, be more reserved/aggressive or more difficult to contact.

What to do if you spot the warning signs of insolvency

Engage quickly with the relevant party/parties and discuss pragmatic, manageable and effective solutions that help the business at risk maintain its trading position and keep the project on track. The earlier you act and collaborate, the more likely you are to find a workable solution. The business might agree to a structured negotiation or an alternative form of dispute resolution (such as mediation). Failing such agreement, or if a party refuses to engage in discussion, move on to an adjudication process as soon as possible. An adjudication decision can secure payment ahead of any possible insolvency, thus removing the risk of becoming an unsecured creditor (with little likelihood of debt recovery).

Alert your commercial directors, people on site and accounts team to the warning signs. Ensure they monitor the situation and report issues early. If the information you gather points to possible financial difficulties, take action immediately (as above). If the parties become entrenched and disputes or formal insolvency proceedings arise, seek legal advice.

Construction insolvency checklist: the warning signs that a party might be (or be becoming) insolvent

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To find out more or for guidance on any of the issues raised above, get in touch with one of the Key contacts.

For an introduction to English insolvency procedures (and the practical action you can take), click here.