How to progress a construction project when a contractor goes bust 

Every construction project carries risks, but few challenges are as daunting as a contractor going bust mid-project. When this happens, it can feel as though the entire endeavour has ground to a halt. Uncertainty looms, subcontractors and suppliers are left in limbo, and the financial implications can be severe. However, while the situation is undoubtedly complex, it is not insurmountable. With careful planning, swift action, and strategic decision-making, a construction project can recover and progress despite the unexpected failure of a main contractor.

The ripple effect

The collapse of a contractor doesn’t just halt work on-site; it sends shockwaves through the entire supply chain. Subcontractors and suppliers, who often rely on steady cash flow, suddenly find themselves unsure about outstanding payments and future work. Investors and project managers must quickly assess their legal and contractual standing, while the spectre of cost overruns and delays grows larger with each passing day.

Past industry upheavals serve as cautionary tales. The collapse of Carillion in 2018 left countless projects abandoned, subcontractors unpaid, and developers scrambling for solutions. More recently, the insolvency of ISG in 2025 underscored the vulnerabilities even well-established contractors face. These cases highlight the importance of having contingency plans and clear contractual protections in place long before trouble arises.

Weighing your options

The instinctive response to contractor insolvency might be to immediately terminate the contract, assuming that cutting ties will allow for a fresh start. However, termination is often a double-edged sword. The moment a contract is terminated, the employer typically becomes an unsecured creditor, standing in line behind secured creditors such as banks when trying to recover financial losses. Additionally, severing ties means restarting the procurement process, renegotiating contractual terms, and potentially reconstructing the supply chain, which is an expensive and time-consuming process.

An alternative approach is to examine whether contractual provisions allow for stepping into the contractor’s role temporarily. Many construction agreements include mechanisms such as collateral warranties, direct agreements, or third-party rights that enable the employer to assume control of subcontractors and suppliers without dismantling existing arrangements. If such clauses are in place, they can be activated to keep the project moving while a long-term solution is determined.

Contractual safeguards

A well-drafted construction contract serves as a shield in times of crisis. Contracts often include provisions for novation, which is a legal process that transfers an existing contract from the insolvent contractor to a new party, ensuring that obligations continue to be met. This is particularly useful in cases where subcontractors and suppliers are willing to carry on, provided payment terms are secured.

Another vital safeguard is the inclusion of step-in rights, which allow project leaders or lenders to assume responsibility for critical aspects of the contract. These rights are often embedded within performance security instruments such as bonds or guarantees. Additionally, financial protections such as Project Bank Accounts (PBAs), which hold funds in trust for subcontractors, can mitigate the impact of a contractor’s insolvency. However, for these accounts to function effectively, all parties must have signed joining deeds – a step that should be taken at the outset of any project.

Contain the fallout

Time is a decisive factor when dealing with contractor insolvency. Delays in addressing the situation can lead to cascading financial and operational setbacks. A case in point is Cardiff Council’s response following ISG’s collapse. By quickly novating the contractor’s agreement to a subcontractor, the council ensured continued payments, preserved financial stability within the supply chain, and kept the project moving forward. This swift, decisive action prevented prolonged delays and safeguarded smaller businesses reliant on the project’s success.

Communication is equally vital. Informing subcontractors and suppliers about the next steps as soon as possible can prevent panic-driven contract terminations. Once a subcontractor terminates its agreement with the insolvent contractor, it becomes much harder to maintain continuity, as novation is no longer an option. Encouraging the supply chain to stay engaged provides breathing room to restructure and salvage progress.

Preparing for the unexpected

When insolvency occurs, you will need to react, but pre-emptive preparation is the best defence against project paralysis. Developers, project managers, and investors should ensure that all contracts contain robust insolvency provisions, step-in rights, and mechanisms for bond and guarantee enforcement from the outset. It is essential to establish a contingency plan that includes:

• A thorough review of warranties, direct agreements, and step-in rights,
• Regular engagement with legal and financial advisors to assess potential liabilities and recourse mechanisms, and
• Maintaining open communication with key subcontractors and securing financial assurances such as escrow arrangements, can dramatically reduce the risks associated with contractor failure.

Being prepared means that if insolvency strikes, project leaders already have a clear roadmap for action rather than scrambling to react in crisis mode.

The long-term consequences of short-term decisions

Navigating contractor insolvency isn’t just about damage control, it’s about protecting the long-term viability of the project and the reputations of all involved. Decisions made in the immediate aftermath will ripple through the project’s timeline and financials. Public sector projects, for instance, must adhere to Public Contracts Regulations 2015, ensuring transparency and compliance in their approach to replacing an insolvent contractor. Failure to do so can lead to legal complications, procurement challenges, and further delays.

Moreover, maintaining trust within the supply chain is crucial. Contractors, subcontractors, and suppliers who feel supported during a crisis are more likely to remain engaged and cooperative, helping to bring the project to completion without further complications.

Navigating insolvency with confidence

The failure of a contractor mid-project is never an easy challenge to tackle, but it is one that can be managed with the right approach. Thoughtful contract structuring, clear communication, and swift strategic action are key to keeping a project on track despite financial setbacks. By anticipating potential risks and having contingency plans in place, developers and project managers can minimise disruptions and protect their investments.

At Newmanor Law, we specialise in guiding clients through these complex scenarios, offering expert advice to safeguard projects and preserve supply chain relationships. If you are currently dealing with contractor insolvency or wish to proactively protect future projects, our team is ready to help you navigate these challenges with clarity and confidence.