Insolvency in construction

Insolvency of the employer, contractor, subcontractor, suppliers or professional advisers on a construction project may compromise the successful completion of the project and the profitability for the parties.

The impact of the insolvency, and the consequent viability of the project, will depend upon the type of insolvency procedure that the defaulting party enters into, the contractual relations between the parties and what security, if any, is in place. There are five main types of insolvency proceedings under the Insolvency Act 1986: 

• liquidation
• administration
• administrative or non-administrative receivership
• part A1 moratorium and
• company voluntary arrangements.

There are also two restructuring tools available under the Companies Act 2006:

• scheme of arrangement and
• restructuring plan.

The standard forms of building contract generally set out procedures for employers and contractors in the event of either becoming insolvent. Protection from the effects of insolvency can be secured in the form of performance bonds, guarantees and retention funds.

This section is maintained by Jonathan Hutt and Stephen O'Grady of Taylor Wessing LLP.

RICS standards: Termination of contract, corporate recovery and insolvency

RICS journal article: How can the industry handle volatile inflation?

RICS journal article: What to do if you suspect contractor insolvency