How to spot the warning signs of insolvency in the construction supply chain

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How to spot the warning signs of insolvency in the construction supply chain

How to spot the warning signs of insolvency in the construction supply chain

UK construction focus

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January 9, 2025

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

Payment and borrowing issues	Any changes in normal payment routines within the supply chain such as: delays to the payment of subcontractors or suppliers; requests to extend payment due dates; an unwillingness or inability to make payments as they fall due; not returning calls/emails; avoiding discussion about due payment; requests for advance payments; and/or indications that the contractor might be relying heavily on credit facilities or borrowing. Any request to the employer to release the retention at a point when it is not due under the contract. A contractor raising claims or contra-charges which have no contractual basis except to increase the sum payable to it.
Behavioural changes	Changes in the behaviour of a business in the supply chain. For example, they may have become more aggressive or defensive, or less communicative? Under-tendering and offering discounts to win work ("cut-throat" bidding). A preference for engaging in disputes – even on small issues – rather than settling matters amicably as the business tries to manage cash flow and juggle creditors. This might indicate that the party has no money to pay or feels the need to apply pressure to secure due payment quickly. Increased volume of statutory demands instead of engaging in the usual dispute resolution procedures. Restructuring.
Contractual changes	Requests for unexpected changes to a contract (e.g. relating to payment terms, such as renegotiating credit limits). For example, look out for a party which suspends certain works without a valid explanation or wants to scale back a project by omitting certain works. A contractor seeks an employer's consent to assign the payment under a building contract to a bank or other creditor.
Activity on site	Changes in site progress and attendance which do not reflect the stage in the programme, particularly: a reduction in the number of workers attending site; workers not turning up for work (perhaps because they are not being paid or have been let go); changes in the management team; or an unexpected removal of workers from the project. A decline in the volume of materials being delivered to site. Equipment or materials disappearing from site. Any decline in the quality of work on site.
Delays to the project	Delays on a project or a slowing down in progress (which might suggest that the party does not have the funds to finance the necessary supplies and labour to carry out the work).
Defects	An increase in the number of defects or reduced quality in the works. (Is the contractor/subcontractor cutting corners and investing less resources into a project?)
Late filing of accounts	The late filing of accounts or annual returns at Companies House. These documents provide a good tool for assessing a company's solvency. Pay attention to key signifiers such as no profits for a number of years or a change in a company's current assets. How much cash does it have or assets that can be converted to cash? Although the information is almost always out of date, it is good practice to check a company's (and its parent company's) filings at Companies House before contracting with a company, or if concerned about its financial viability, or if there are rumours in the media or within the supply chain about the company's financial position.
Keep a close ear to the ground	Have creditors issued winding-up petitions? Are there any shareholder or public announcements touching on the affected company's financial standing? Have personnel been asked (unexpectedly) to leave the project? Or have a number of them resigned from their jobs?
Any judgments?	Check whether there are any unsatisfied court judgments against a contractor or subcontractor. The existence of any such judgments could suggest that the contractor or subcontractor has inadequate funds to settle bills and the claims successfully made against it.