Protecting your construction projects from insolvency risks

Insolvency remains a significant challenge for the UK construction industry, with the number of company insolvencies on an upward trend and still at levels last seen during the 2008-09 recession. But with the right strategies, stakeholders can reduce the risks that insolvency has on their projects and their organisations.

Here, we consider underlying causes of construction insolvency, the impact on live projects, and what parties can do to mitigate that risk and build protections into their operations.

Why construction is prone to insolvency

There is no single reason why construction is more susceptible to insolvency - rather, there are several interrelated factors such as:

• Tight profit margins resulting in little room to absorb unexpected costs or delays
• Cash flow challenges and late payments down the supply chain creating problems, even where businesses have a strong pipeline of work
• Elevated costs of materials and labour, which have increased over the last few years and not fallen back to previous levels
• Regulatory pressures, like the extra costs and delays in complying with new building safety legislation or addressing remediation claims arising from it.

As it stands, the construction industry is one of the sectors most affected by insolvency in the UK, with the government statistics showing that 17% of company insolvencies in the 12 months to May 2026 were in the sector.

The impact on construction projects

The consequences of insolvency in construction are highly disruptive and often immediate. They include:

• Project delays, disruptions and potentially lengthy disputes
• Increased costs to complete the affected project, through replacement contractors, legal fees, and project re-mobilisation
• Wider impacts on other projects and investment, for example where a contractor becomes insolvent on one project, and the developer must reallocate resources, time and money from other projects to the failing project instead.

This makes avoiding or reducing the risks arising from insolvency so important.

Protections in your construction contracts

When negotiating construction contracts, especially for projects that may be particularly susceptible to insolvency events:

• Carefully consider if the definition of "insolvency" in the contract is sufficiently wide
• Understand what the contract says will happen if there is an insolvency event, whether there are suspension and termination rights, and whether any other important terms specific to the project need to be included
• Check whether there are retention of title clauses, allowing contractors and subcontractors to reclaim goods that are not yet paid for
• While "pay when paid" clauses (ie I'll pay you if I get paid) are generally prohibited under UK law, an exception can apply allowing contractors to withhold payments to subcontractors if they themselves haven’t been paid due to the employer’s insolvency – check whether the contract expressly allows for this.

Ancillary contracts can provide further protections, for example collateral warranties from important parties in the supply chain, parent company guarantees or performance bonds that cover insolvency, and project bank accounts that ringfence money for the specific project. However, there may be a cost to some of these, and whether they are available will depend on the bargaining power of the parties.

That said, none of these steps can prevent an insolvency from occurring.

Protecting your position during the project

Once construction is underway, you can try to safeguard your position by keeping detailed records, such as what materials and equipment are at the site, what's been paid for, and the progress of works. This can help you quickly evidence any losses and assert your rights if insolvency occurs.

If you begin to suspect financial instability in the other party, the key is to act promptly. Review your contract to understand your options. Seek expert insolvency advice early, which help you preserve your position, and even consider initiating insolvency proceedings if this would be strategically beneficial.

Commencing a construction adjudication in a payment dispute before the other party enters insolvency could also increase your chances of recovering money, instead of relying on becoming an unsecured creditor with limited prospects of repayment post-insolvency - but doing this could trigger an insolvency, so timing and advice are key here.

Understanding and preparing for these scenarios can make a significant difference in protecting your interests mid-project.

Construction insolvency looking forward

Insolvency remains a pressing concern for the construction industry, but the practical tips on contractual protections and strategic risk management above can help stakeholders build resilience into their projects and supply chains.

Looking further ahead, the UK government has turned its attention to improving payment practices in the UK, including in the construction sector. Its Commercial Payments Bill is currently wending its way through Parliament and aims to tackle late payment - and this includes a proposed ban on retention clauses in construction contracts. While the detail may yet evolve as the Bill progresses through Parliament, the government’s direction of travel is clear: improving cash flow and payment certainty across supply chains. If implemented effectively, these measures could play an important role in helping to curb the persistent problem of insolvency in the construction sector, although implementation of the Bill will also bring challenges and considerable change for the industry as parties adapt their commercial arrangements and risk management practices.