The collapse of Carillion in 2018 is a well-known example of the consequences when contractors are not financially robust. However, this issue persists in the construction sector, with the number of companies going bust reaching record levels. According to Mazars, in the year leading to November 2023, around 4,370 construction firms went into insolvency—an average of nearly a dozen a day—marking construction as the sector with the highest rate of business failures in the UK. A significant portion of these were specialised construction activities, such as demolition and plumbing, with subcontractors often left unpaid, resulting in further financial problems downstream. These challenges are exacerbated by fixed-price contracts that were agreed upon years ago, leaving contractors struggling with the surge in costs and reduced demand​.
The collapse of ISG Group last week, one of the UK's largest construction firms, demonstrates that even large contractors are not immune. ISG went into administration, halting multiple government projects, including 24 prison service developments and school building schemes worth over £1 billion. With £4.3 billion in contracts at various stages of completion, the ISG collapse has widespread ramifications, affecting public infrastructure projects, educational facilities, and universities. This scenario is eerily reminiscent of Carillion's failure and highlights the importance of ensuring the financial stability of contractors before entering into significant agreements
The collapse of contractors like Carillion and ISG underscores the importance of financial due diligence when local authorities engage in major projects. Without a robust assessment of a contractor's financial health, authorities risk severe project delays, added costs, and potentially having to find new contractors mid-project.
Arlingclose offers a comprehensive suite of due diligence services to mitigate these risks. Our expertise lies in evaluating a contractor's financial stability by analysing key financial ratios, such as profitability, liquidity, gearing, and interest cover. We delve into historical financial performance, examining financial statements for an extended period to identify any troubling trends that may indicate future financial distress​.
Additionally, we provide indicative credit ratings to gauge a contractor's creditworthiness. In cases where a company lacks a formal credit rating, we use this method to approximate its credit strength and default probability. This insight helps local authorities understand the contractor's financial resilience and the potential risks associated with long-term contracts​.
For example, we advise councils on various strategies to protect their interests if the contractor faces financial difficulties during a project. Our tailored reports provide ongoing insights into the contractor’s financial health throughout the contract period. We can also highlight key contractual elements that help mitigate risks and outline best practices for ensuring clear roles and responsibilities.
By employing our due diligence services, local authorities gain a detailed understanding of the contractor’s financial capacity, operational stability, and potential vulnerabilities. Arlingclose’s analysis equips councils with the necessary information to make informed decisions, securing not only the successful delivery of projects but also the prudent use of public funds.
For further details on how Arlingclose can support your due diligence needs, please contact us at pmarshom@arlingclose.com.
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