Construction collapse

As you may be aware, construction giant ISG collapsed last week, with 7 of its subsidiaries entering into administration, in an announcement which will send shockwaves through the construction sector.

It’s not the first time we have had news of a construction company’s insolvency – in 2018 the news was all about Carillion, and it seems that construction hasn’t learned from its mistakes. In the midst of any large collapse like this, it’s likely to cause a domino effect of other companies to fall. Between its subsidiaries, the construction company had numerous live projects, almost £2bn of which were government contracts, which will undoubtedly cause a ripple effect on employers, suppliers and sub-contractors alike.

If you are in the industry, you should check your contracts. You may know you are in contract with ISG, or alternatively you may have been working for a different entity but will still be affected if ISG were involved under the main contract or any sub-contract. It is key to understand who is involved within your contracts, whether directly or indirectly, even if this is only through collateral warranties, as any links to ISG or their subsidiaries may affect your project.

If you are currently in a contract that is affected, you need to assess the project and where you are at within that project. Have you been paid for your work to date, do you have any materials on site, have you allocated resource and turned down other works? Evaluate where you are at and where your risks are.

• If you are owed money: it is likely to be difficult to recover the debt in full, though you do need to contact the administrator who is dissolving the business and ensure your invoices are included within the debtor list. Their job is to collate all the business’ debtors and creditors and you may receive a small percentage of the debt that is due to you, based on how much capital they have once the business has been fully wound up. You can do this for all works that you are due money from, whether you have invoiced them or not, although there is usually a cut-off date published by the administrators to put in any additional invoices.
• If you have materials on site: you need to work out who owns them. It should be clear within the contract when the ownership of the materials passes, and this can be at any stage. If it is stated that title to the goods passes as soon as they are delivered, they will be treated as an asset of ISG’s and the administrators can do as they please with them. If you still own them you could choose to go to site and recover your materials, however this can only be done with their permission (so as not to be trespassing) and if they are not installed into the fabric of the building. As soon as they are fixed to the building, it can be treated as criminal damage to remove them.
• If you have allocated resource, or begun preparatory works: unfortunately, this is the least likely avenue to be paid, but you never know. Take a look at the contracts and see what you can claim for, as it may be that design work is highlighted as a specific cost and you can charge for this. It may be that they have to give you a certain amount of notice to cancel or suspend works and you can charge for not receiving this. It may be that you have demobilisation costs that you can charge for. These are only to be what is reasonable, but will go a long way to recovering your losses on any contracts.

If you are working directly with ISG on any live projects, and the contract doesn’t allow for any of the above, all may not be lost. Generally, ISG acted as a main contractor on their works, meaning that there may be an ultimate employer on any of these sites. Where this does apply, those employers will remain in need of the works that they contracted ISG to complete, and may be happy to work directly. On most sites currently, it is expected that you sign a collateral warranty on behalf of the employer allowing them to sue you directly for any failures. However, they also contain step-in clauses that allow for the employer to ‘step-in’ to the contractors shoes, and take on the project as though nothing had happened and there was no termination or disruption experienced.

If you have not agreed a collateral warranty, you may still be able to contact the employers directly and ask to take out a new contract with them for the remainder of the works. We have in the past negotiated this so that a client of ours received the remainder of the project fees and completion, but additionally received storage costs, remobilisation costs and payments to cover losses, which in turn earned them extra monies which allowed them to make a profit.

If you are not currently on a live ISG contract, you may be thinking you have escaped any backlash from their collapse, however you should really look at the bigger picture, as there may be other ramifications for you. Although you are not working with them now, what were your previous contracts? Do you have any outstanding liabilities or payments, including retentions? Anything that you are owed by them needs to be requested before any deadlines are imposed by the administrator.

Where you have worked on previous contracts with them, you will likely have liability on those projects for up to 15 years. It may be worth looking at those and seeing when your responsibilities end on each older contract, and if there are any collateral warranties. Where you have signed into collateral warranties with third parties for these projects, these persons can sue you where they find any faults in your works, and with ISG no longer being an entity that can bear any of this burden, you can be expected to hold this directly with that party.

As an aside, consequential issue presented by the collapse, it is the best time to assess your supply chain to find out if your suppliers or sub-contractors been affected.  This will undoubtedly have a knock-on effect on your business, as they may be struggling more with cashflow, facilities or stock – however, they may actually have the opposite, with more available resource that can be applied to expediting your works. It is a good time to get your processes in order and make any allowances for any sudden changes which may occur. It may also be a good opportunity to review their contracts and ensure that you wouldn’t be left in trouble if any other contracted parties were to befall the same fate.

Whatever stage you’re at with the above, we can provide a free, no-obligation consultation to advise on your position and recommend next steps. If you are entering into any other construction contracts in the coming weeks and months, ensure you don’t fall into any of the traps and failures that could be avoided by correctly negotiated contracts should the worst happen again.