Construction firms continue to go bust

According to the latest figures from the Insolvency Service published this week, construction firms accounted for 17% of all insolvencies in England and Wales in the 12 months to June 2025, with 3,984 registered construction businesses becoming insolvent. The construction industry continues to experience the highest number of insolvencies in England & Wales. In June 2025 alone, there were 325 construction insolvencies. This mirrors the trend last year in 2024, with construction firms accounting for 18% of all insolvencies. In one of our previous articles, we discussed the potential options to help insulate a construction contract from insolvent contractors.

Despite interest rates coming down and the government’s focus on housebuilding and infrastructure, it is increasingly important for clients to be aware of the steps they can take to try and protect their position. If project volumes and construction activity increases, the risk of insolvency to supply chains and leaving businesses on the backfoot also increases. Jake Gatley, Senior Solicitor, highlights the potential warnings and what action should be taken.

How to recognise insolvency

Whilst they are not determinative, parties should be alive to the signs that a contractor may be experiencing financial difficulties. There may then be an opportunity to take steps to manage the potential effects of a contractor becoming insolvent on a project. These signs could include:

• industry rumours about a contractor’s finances;
• a contractor filing its annual returns late;
• multiple members of a contractor’s key project team leaving the contractor at the same time;
• supply chain members not being paid or not, at least, being paid on time;
• a contractor making inflated applications for payment;
• requests for advance payment;
• inactivity, or a lack of materials or people on site;
• an increase in the number of defects, disputes or claims, and/or exaggerated claims;
• a lack of response to communications.

What to do on insolvency

Upon insolvency, it is important to take practical steps, including securing the site and notifying funders. A carefully prepared construction contract will set out what happens when a party is insolvent. In a JCT building contract, for example, the most notable consequences of the contractor being insolvent (or falling within the definition of ‘Insolvent’) are:

• no additional sums fall due to a contractor, other than those already due, and the employer may not be required to pay those sums already due where a pay less notice is given or the insolvency has occurred after the last date when a pay less notice could be given but before the final date for payment;
• there will be a right for the employer to terminate the contract (see clause 8.5.1 of the JCT Design and Build Contract (2024));
• the works are automatically suspended, whether or not the employer issues a termination notice; and
• the contractor is liable for those expenses properly incurred by the employer as a result of the termination or otherwise (see clause 8.7.4.1 of the JCT Design and Build Contract (2024)).

It is however important that parties follow the correct termination procedure. If a party purports to terminate a contract where the contractor is not strictly ‘insolvent’, as defined in a contract, that contractor would be entitled to treat the purported termination as a repudiatory breach of contract. In turn this would entitle the contractor to seek to recover its losses for repudiatory breach, including any loss of profit. We therefore recommend that legal advice is obtained before exercising a right to terminate to minimise the risk of inadvertently repudiating the contract. It is also worth being aware that although enforcing an adjudication decision in an insolvency scenario is likely to be difficult, contractors can still refer disputes to adjudication under the Construction Act.

Impact of CIGA on termination for insolvency

Careful attention should be given to unamended JCT and NEC contracts, as certain standard termination provisions cease to have effect upon insolvency, because of the Corporate Insolvency and Governance Act 2020 (“CIGA”).

For example, JCT and NEC contracts entitle both the employer and the contractor to terminate in the event of the other party’s insolvency. However under CIGA, contractors cannot legally terminate for employer’s insolvency. On the other hand, provisions allowing employers to terminate for contractor’s insolvency remain unaffected. In other words, companies higher up the supply chain are not prevented from exercising their right to terminate “downstream”, where one of its suppliers becomes insolvent (assuming the contract terms allow them to do so).

If you are considering terminating for insolvency, it is important to carefully read the termination provisions of the contract (including any notice provisions), rigorously observe these requirements, and check with a legal professional whether their provisions are enforceable in light of the CIGA rules.

What steps can you take now?

At Herrington Carmichael LLP, our construction team advises project clients, main and sub-contractors, on draft contracts and claims concerning defects, insolvency events and the release of monies due under a contract. Please contact us.

Sources: The Insolvency Service – Company Insolvency Statistics, July 2025 (19.08.2025)