Collapse of construction firm ISG risks further fallout across supply chain

The collapse of the international construction firm ISG, into administration in late September risks igniting a domino effect among smaller firms in its supply chain who are unlikely to be paid for recent sales. ISG’s failure is the biggest construction firm to collapse since Carillion in 2018.

ISG, owned by the US private equity firm Cathexis, has revenues of about £2.2bn and reportedly a £4bn plus portfolio of unfinished and planned projects, including dozens of vital public sector buildings such as schools and prisons, as well as work for several high-profile private sector clients. According to construction data firm Barbour ABI, ISG had unfinished projects worth £1.7bn, including the £150m fit out of Google’s new headquarters building at King’s Cross. As a result, building services firms are now facing millions of pounds in unpaid bills.

Attempts to sell the business, either in whole or in part, all failed within the required timescales. Cathexis also could not secure a refinancing deal, which forced ISG into administration. The collapse led to around 2,200 immediate redundancies, with only 200 employees retained to assist administrators in winding down the business. The eight subsidiaries of ISG are all in administration. Majority of debts due prior to the administrators’ appointment will rank as unsecured claims against the company. Unsecured creditors are unlikely to receive a dividend. Administrators are expected to publish their proposals, outlining their strategy for moving forward, within eight weeks from 20 September.

In an email to staff just prior to the administrators taking over, the CEO of ISG Zoe Price, outlined the catalysts which led to the collapse: “The group’s trading and cash performance has been impacted by legacy issues relating to the large loss-making contracts secured in between 2018 and 2020 (primarily in the residential, logistics & distribution sectors as well as some data centre projects). Trading out these projects has had a significant effect on our liquidity.”

Project-based bank accounts are increasingly seen as a viable safeguard to ensure funds are allocated directly to subcontractors, helping reduce contagion risk from corporate failures, like ISG. By ring-fencing project-specific funds, these accounts limit the diversion of cash flow to other areas of a business, ensuring that payments to subcontractors are prioritised and reducing their exposure in the event of a main contractor’s insolvency.

Many of these problematic legacy contracts were secured on a fixed-price basis prior to the Covid-19 pandemic, which left ISG unable to mitigate the escalating costs of materials and labour, that have strained cash flows. Suzannah Nichol, chief executive of trade body Build UK, says ISG’s collapse of construction firm is “devastating” for the sector and warned that it could lead to other firms going under. The National Access & Scaffolding Confederation (NASC) echoed concerns, stating that ISG’s collapse has left hundreds of subcontractors and their employees facing significant uncertainty. Many SMEs in the scaffolding and access sector are particularly vulnerable to insolvency as they operate on tight margins and cannot absorb unrecoverable debts. The strain on ISG’s cash flows was further exacerbated by the ongoing impact of geopolitical issues on global supply chains, which has continued to drive up costs, making it difficult for firms to manage fixed-price contracts.

The collapse of ISG has also led to severe logistical challenges, as firms now have equipment trapped across multiple construction sites that they can no longer access. This has affected their ability to take on new projects or service existing ones, further compounding their financial difficulties. Many subcontractors had stopped work for some time due to missed payment deadlines. The parallels with the collapse of Carillion in 2018 are notable with the risk of widespread insolvencies across the construction supply chain, especially among smaller subcontractors. “The current ISG collapse threatens to repeat this pattern, with scaffolding companies facing potential job losses, halted projects, and cash flow crises that could see many pushed to the brink of financial collapse,” wrote the NASC in its statement.

In response to the ISG crisis, the Building Engineering Services Association (BESA) urged the government to expedite a consultation aimed at addressing the ongoing late payment crisis in the sector. Just a day before administrators took control of ISG, the government unveiled new measures to support small businesses tackling late payments. “The government will consult on tough new laws which will hold larger firms to account and get cash flowing back into businesses – helping deliver our mission to grow the economy,” the press release by the Department for Business & Trade stated.

David Frise, CEO of BESA, said ISG’s collapse was the latest in a series of administrations that had undermined UK supply chains in recent years. “Sadly, the lessons of Carillion have not been learned and our members and hundreds of other subcontractors are left to pick up the pieces yet again,” said Frise. “Profit margins in construction are wafer thin and the fragile basis of many contracts means SMEs are particularly exposed. Several excellent, financially sound firms could go under through no fault of their own with significant job losses because of this.”

ISG suppliers affected by this corporate failure need to work diligently to assess the scale of unrecoverable debts, the impact on corporate cash flows, disruption caused by trapped equipment across multiple sites, potential legal liabilities, and the risk of insolvency due to halted projects and unpaid invoices, while simultaneously exploring opportunities to recover assets and secure alternative revenue streams to ensure business continuity.

Begbies Traynor Group can support affected firms with guidance on submitting an unsecured creditor claim, cash flow management, refinancing, asset recovery, contractual disputes, as well as a broader insolvency risk assessment. If your business is affected by the collapse of ISG and would benefit from a confidential discussion, do not hesitate to contact our team today.