Subcontractor insolvency risk needs early warning

Subcontractor insolvency risk is the chance that a package fails mid-job because the firm delivering it runs out of cash. For main contractors and developers, the practical defence is not a better credit check at tender. It is a monthly habit of reading the signals your own project records already hold, and acting before the firm stops turning up.

What the CN survey found

Construction News surveyed more than 100 senior executives across contractors of every size, from under £25m turnover to over £1bn. The picture on supply chain health is uncomfortable reading for anyone holding a package list.

A quarter said they had seen more frequent financial distress or insolvency among supply chain partners in the past 12 months. Just over 37 per cent said it was about the same as the year before. Four in 10 said payment times had worsened, and 54 per cent said they routinely or frequently fund delivery costs before the client pays.

The controls in use are thin. Half use credit monitoring and formal financial health checks. A quarter use prequalification requirements on financial standing. Only 6 per cent use project bank accounts or ring-fenced payments, 4 per cent use supply chain finance, and 2 per cent hold contractual step-in rights for key subcontractors.

Respondents were blunt about where the pressure sits. One named "main contractors squeezing margin from subcontractors" as the biggest unspoken risk.

The squeeze has a developer side too. Bellway's full-year results say it has received price increase requests from suppliers and subcontractors and has kept pushing back to limit the effect on agreed rates. That is a sensible stance, but the cost pressure lands somewhere, often in the specialist's working capital.

Why the usual checks miss it

A credit report at PQQ stage tells you how a firm looked on its last filed accounts. For a small specialist, those accounts can be a year or more old by the time you place the order. A firm that was sound at appointment can be in trouble six months in, and your tender file will not tell you.

Financial standing at prequalification is still worth doing, but not as a gate you pass once. Distress tends to show up in behaviour on site and in the commercial paperwork long before it shows in Companies House.

The cost of missing it is well known. Construction Enquirer reports that Lovell is lined up to finish 62 affordable homes in Bow after Jerram Falkus Construction's collapse. Tower Hamlets has approved a 26-week pre-construction programme, with investigations into the concrete frame and checks on existing work, and practical completion now targeted for June 2028. That is a main contractor failure rather than a subcontractor one, but the lesson runs down the chain. When a party fails, everything you cannot prove about the work already done has to be investigated again, at your cost and on your programme.

The signals that show up on your job first

In my experience the warning signs are rarely hidden. They sit in different people's inboxes and nobody puts them together.

• Insurance lapses. A policy expires and the renewal certificate arrives late, or with reduced cover. Firms under pressure cut premiums before they cut anything else.

• Labour on site drops while the valuation keeps climbing. The application says 60 per cent complete and the site manager can count half the gang there was last month.

• Requests to change payment terms. Asking to be paid early, to have materials off site valued, or to split an application.

• Their suppliers start calling you. A merchant or hire firm asking your site team who is paying for the kit is a late signal, not an early one.

• Submittals and samples slow down. Technical submissions stall because the firm's design or estimating resource has gone.

• Variations get aggressive. A run of small claims on a package that was quiet for months often means the firm is trying to find cash, not that the design has changed.

None of these proves a firm is going under. Two or three together on the same package should trigger a conversation that week.

A monthly supply chain health check

Run this at each valuation date, package by package.

1. Confirm every insurance on the package is in date and at the cover your sub-contract requires. Flag anything expiring in the next 60 days.

2. Compare the gross valuation against measured progress and labour returns. Look for applications running ahead of the work.

3. Check payment notices and pay less notices were issued on time, and that you paid on the final date. Late payment from you is the fastest way to create the distress you are trying to avoid.

4. Review open variations by package. Note any package where the number or value of claims has jumped.

5. Check submittal status. Overdue technical submissions on a critical package are a programme risk whatever the cause.

6. Refresh the financial check on your top ten packages by value, plus any package showing two or more signals above.

7. For each red package, record who owns the conversation, what was agreed, and what your fallback is. That means a named alternative firm already prequalified, and the drawings and scope ready to reissue.

Step 7 is the one most teams skip. When a firm fails, the time you lose is the time it takes to find, vet and brief a replacement.

Worked example

This is an illustrative example, not a real project. A drylining package on a residential block is valued at £1.2m. At month five the application claims 55 per cent complete. The labour return shows 14 operatives against 22 the month before, and the firm's public liability certificate expired a fortnight ago with no renewal on file. Two variations for minor re-sequencing arrive in the same week.

On their own, each is routine. Together they justify a meeting with the firm's director before you certify. You certify what is measured, not what is applied for, issue the payment notice on time, ask for the renewed insurance before the next operative goes on site, and quietly confirm your second-choice drylining contractor is still prequalified and has capacity. If the firm recovers, you have lost nothing. If it does not, you are weeks ahead.

Paying on time is part of the control

The survey's 54 per cent figure on funding delivery before the client pays should worry main contractors as much as subcontractors. If you are carrying cash for the client and passing the delay down the chain, your supply chain is weaker than your package list suggests.

Developers can help here. Ask your main contractor to show you its certification schedule and its record of paying on the final date. A client that can see design, procurement and payment progress across packages is far less likely to be surprised by a failure. SubTrada was built so the client profile can see that progress on the same platform the commercial and build teams use, rather than in a monthly report.

Evidence beats assurances

The firms that come through supply chain failures cleanly are the ones that can prove what was done, approved and paid at the moment a subcontractor stops. That means a current drawing register, approved submittals with dates, numbered instructions for every variation, and certified valuations that match the work on site. If you keep subcontractor profiles, PQQ tiers and insurance expiry dates in a directory like SubTrada's, the first three steps of the checklist above become a filter rather than a chase.

FAQ

What is subcontractor insolvency risk?

It is the risk that a subcontractor or supplier on your project cannot pay its debts and stops trading before its package is complete. It brings delay, replacement cost and defect liability onto the main contractor and, in turn, the client.

How often should main contractors check subcontractor financial health?

At least at each valuation for live packages, with a fuller financial refresh on the highest-value and highest-risk packages. A check at tender stage alone goes stale quickly.

What are early warning signs of a subcontractor in financial trouble?

Lapsed or reduced insurance, labour on site falling while applications rise, requests to change payment terms, suppliers chasing your site team, stalled submittals and a sudden run of variations.

Do project bank accounts reduce subcontractor insolvency risk?

They protect money due to the supply chain if a party higher up fails. The CN survey found only 6 per cent of respondents use them, so most teams still rely on monitoring and fair payment.

My view: every commercial team should name its three most exposed packages at the next valuation meeting and have a prequalified fallback for each by the end of the month. If you cannot do that from the records you hold today, that is the first problem to fix.