Construction Insolvencies – How to Mitigate the Risk of Insolvency in Construction in 2025
The UK construction industry is a cornerstone of the nation's economy, driving infrastructure development and employment.
However, recent trends have raised concerns about the financial stability of construction firms. Construction companies made up 16.3% of all 1,971 insolvencies in England and Wales in December 2024, according to the Insolvency Service.
Several high-profile insolvencies have underscored the vulnerabilities within the construction industry. The collapse of Carillion in 2018 had widespread repercussions, and the similar collapse of the ISG group in September 2024 has highlighted the domino effect of large contractor failures leading to further insolvencies down the line.
As bleak as the outlook is, there are ways in which the construction sector can adapt to economic headwinds and mitigate the risk of insolvency.
Contents
The State of Construction Insolvencies in 2025
The UK construction industry has been navigating a challenging landscape marked by economic pressures, regulatory shifts, and operational hurdles.
Recent Insolvency Data
In January 2025, the UK economy experienced an unexpected 0.1% contraction, with the construction sector notably contributing to this decline. This downturn underscores the financial vulnerabilities present within the industry.
There are a number of factors that continue to play a part in the ongoing high-rate of insolvencies within the sector.
Major Challenges Driving Construction Insolvency in 2024-2025
- Economic Pressures: The construction sector has been grappling with rising operational costs, increased taxes, and wage hikes. These economic pressures have strained profit margins and heightened the risk of insolvency among firms.
- Regulatory Changes: Rapid and widespread regulatory changes within the UK such as the Building Safety Levy have placed substantial pressure on construction firms.
- Project Delays and Supply Chain Disruptions: The collapse of major construction firms such as ISG has had a ‘ripple effect’ across the industry. ISG's insolvency is likely to have continued negative effect on the entire supply chain, with the collapse leaving numerous subcontractors and suppliers unpaid, and leaving creditors owed over £300 million.
- Labour and Skills Shortages: The UK continues to face significant challenges in building major infrastructure projects due to a shortage of skilled workers in the construction sector. Factors contributing to the labour shortfall include a decline in workforce numbers since 2019, Brexit, the pandemic, and an ageing workforce, with particular gaps in specialised trades.
- Tougher Lending Conditions: A study by the British Business Bank indicated a decline in lender financing SMEs, with the total stock of bank lending decreasing by 12% in 2023 compared to 2022, reflecting higher borrowing costs and increased economic uncertainty.
- 'Race to the Bottom' in Tendering: The construction industry has experienced a trend where contractors submit extremely low bids to secure projects, often below actual costs—a practice known as 'suicide bidding'. This approach leads to several negative outcomes including poor quality work, increased disputes, safety concerns and further financial instability.
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Recognising the Early Warning Signs of Insolvency
Whilst recent insolvencies have shown that everyone is at risk and no company is ‘too big to fail’, identifying financial distress early can give construction firms the opportunity to take corrective action before insolvency becomes inevitable.
Some key warning signs that can indicate a construction business may be at risk include:
Persistent Cash Flow Problems
Regular cash shortages, even when projects are ongoing, signal underlying financial instability. Closely monitor your incoming and outgoing payments to ensure liquidity.
Delayed Supplier Payments and Late Wages
Struggling to pay suppliers or workers on time suggests deeper financial issues. Delays in payments can lead to supply chain disruptions and even damaged relationships with key stakeholders.
Declining Profit Margins
A full order book does not necessarily mean a business is profitable. If profit margins are shrinking, it could indicate pricing issues, cost overruns, or highlight issues within project management processes and tools.
Increased Borrowing and Reliance on Credit
Continuously taking on new debt or using credit to cover operational costs is a major red flag. It’s essential that you have a clear view of your finances to generate sufficient cash from operations and avoid falling into a debt spiral.
Frequent Payment Disputes and Contract Breaches
Regular disagreements over payments or contract terms can indicate financial distress. Legal battles and withheld payments can further strain cash flow and push firms closer to insolvency.
High Employee Turnover
A sudden exodus of key staff can often point to internal instability. Similarly, if a company finds it increasingly difficult to win new contracts, it may be a sign that clients are losing confidence in its ability to deliver.
Avoiding ‘Bad Debt’ in Construction
Bad debt is a major contributor to insolvency in the construction industry, often stemming from unpaid invoices, unreliable clients, or poorly structured contracts.
No company is immune to the effects of bad debt, as was shown by ISG Group’s collapse under an estimated £1.1bn of bad debt, causing a domino effect across the industry leading to no payouts to the trade contractors owed at least £308m.
This is a clear lesson for the wider construction sector and shows that taking proactive steps to mitigate financial risks and protect cash flow is more crucial than ever.
The Seven Pillars Of Avoiding Bad Debt
The main learnings to take from this is that cash is king, be strict with invoicing, credit control and choosing suppliers or clients will go a long way in ensuring you can weather what has been coined 'the perfect storm' in construction.
Following the seven key pillars for avoiding bad debt should keep money in the bank:
- Clear and lawful contracts with correct payment terms and conditions for late payment
- Send invoices on time and promptly record payments
- Set up a credit control policy
- Be consistent with the credit control policy
- Say goodbye to customers that don't pay
- Always know your current cash position and cash flow forecast
- Have full and accurate visibility of data
Mitigating Insolvency Risk in Construction
Proactive financial management and strategic planning can help construction companies put measures in places to manage risk and have a clearer financial picture.
By leveraging technology, improving payment practices, and diversifying revenue streams, companies can not only build long-term resilience, but mitigate risk and set themselves up for success.
Strong Financial Management and Forecasting
A lack of financial visibility is one of the biggest threats to construction businesses. Digital financial solutions play a key role in monitoring cash flow, tracking project costs, and predicting financial health.
· Using ERP for Real-Time Financial Oversight: Construction management platforms and ERP systems like Access Coins provide construction companies with real-time insights into project costs, profit margins, and outstanding payments. By consolidating financial data, ERP systems help businesses identify risks early and take corrective action.
· Accurate Forecasting and Budget Control: Access to advanced financial tools with historical project data allows construction firms to model different scenarios, ensuring they can anticipate potential cash flow gaps and adjust spending accordingly.
Improved Payment Practices
Late payments and cash flow disruptions are leading causes of insolvency in construction. Implementing best practices for securing prompt payments can protect financial stability.
· Strengthening Payment Terms: Clear contract terms with staged payments, upfront deposits, and retention clauses help ensure steady cash flow.
· Automating Invoicing and Credit Control: Digital solutions can streamline billing, send automated reminders, and flag overdue payments, reducing the risk of bad debt.
Diversification and Risk-Spreading Strategies
Relying too heavily on a single revenue stream can leave firms vulnerable to market downturns. Diversifying income sources can help to create financial stability in uncertain times.
· Exploring New Markets: Expanding into different sectors (e.g., infrastructure, refurbishment, or renewable energy) can reduce reliance on volatile construction markets.
· Varying Contract Types: A mix of public and private sector work, as well as long-term framework agreements, can balance cash flow and reduce exposure to risk.
Building Financial Resilience
Strong financial foundations help construction firms withstand economic challenges and industry fluctuations.
It’s crucial that we all understand financial resilience is not something to be considered in moments of crisis, but to establish early in order to avoid falling into common pitfalls.
· Reducing Debt Dependency: Over-reliance on borrowing can make businesses vulnerable during economic downturns. Prioritising cash reserves and controlled spending can help mitigate this risk.
· Managing Rising Material Costs: Locking in supplier agreements, bulk purchasing, and using digital procurement tools can prevent unexpected cost escalations.
Strengthening Financial Stability with the Right Tools
Construction insolvencies remain a significant challenge, but businesses that take proactive steps in financial management, risk mitigation, and payment control can improve their stability.
By recognising early warning signs, enforcing stronger contract terms, and leveraging digital solutions, firms can gain better financial oversight and reduce exposure to risk.
A robust ERP system like Access Coins can provide real-time visibility into project costs, cash flow, and outstanding payments, helping businesses make informed financial decisions.
With tools for forecasting, credit control, and automated invoicing, Access Coins enables construction firms to track financial performance more effectively and respond to potential risks before they escalate.
