When Administrators were finally appointed over ISG’s UK operating companies on 20 September 2024, and all trading ceased immediately, it ended weeks of speculation about the fate of the UK’s sixth-largest construction business. In fact, rumours about ISG’s financial vulnerability had been circulating for some time and advisers in the industry had been warning clients to avoid using ISG for several years.

The facts and figures

In its last published accounts (for 2022), ISG declared a consolidated turnover figure of £2.2bn across all of its UK activities. The pre-tax profit was an almost vanishingly invisible £11.5m. The operating margin appears to have been no more than 2% and probably less. It had total assets of £944m and a net worth of £156m. 2,200 staff were laid off immediately by the Administrators.

The outstanding workload

According to data analysts Barbour ABI, ISG was involved in 69 government projects when it failed. 22 projects were for the MoJ, including a £300m contract to extend Grendon Springhill 2 prison and a £155m deal to expand three other prison sites.  The company was also involved in 16 projects for the Department for Education and the Department for Work and Pensions. Its government contracts were valued at over £1bn.

According to The Construction Index, overall, ISG had projects totalling over £2.5bn on site and had been awarded contracts on a further £1.7bn of work yet to start. This means that 33 awarded contracts, 57 projects in progress on-site and three imminent completions have been left in limbo.

The financial damage

The supply chain and other creditors

The 2022 ISG group accounts showed total liabilities of £881m of which £280m was due to trade suppliers. The Administrators have already identified £180m of unpaid supplier invoices at seven of the eight ISG companies, but this figure is bound to increase significantly as they ask creditors for their claims. It would not be surprising if total debts, excluding those made by clients for breach of contract, ended up well north of £1bn.

Much of this burden will fall on sub-contractors, many of which will be small businesses without the financial resources to withstand these losses. In turn, there will be heavy write offs for trade insurers who provided cover for ISG suppliers.

Private and government clients

Damages for non-completion of contracts will be enormous, arising from costs incurred by clients in completing contracts in progress or re-tendering contracts awarded but not started. With contracts valued at £4.2bn either in progress or due to start, the loss to clients may also be measured in billions. Some of this will end up as a cost for the insurance sector under performance bonding arrangements.

Employees

Already, 2,200 ISG staff have lost their jobs, a figure which will be multiplied several times over by workers and staff laid off by the sub-contractors affected. Given the current acute shortage of labour in the industry, it should be possible for these job losses to be mitigated to a substantial degree, but even so, people will suffer a short-term financial loss because only a part of their entitlements are covered by government guarantees. The Administrators believe that the ISG staff entitlement claims will total at least £70m, a burden which will transfer to the taxpayer via HMRC and the Redundancy Payments scheme.

What went wrong at ISG?

Comments from the Administrators, industry experts and some ISG insiders have identified a litany of woes which contributed to the failure:

• Loss-making large contracts taken on between 2018 and 2020.
• Inability to raise extra funding.
• The failure of attempts to find buyers for the businesses as going concerns.
• A flawed business model dependent on wafer-thin profit margins.
• Loss of vital experience through two major redundancy programmes in 2023.
• Management complacency and detachment from the day-to-day business.

More will become apparent when the Administrators publish their proposals and subsequent progress reports. Among questions to be addressed may be the valuations put on contracts in ISG’s published accounts and internal management figures.

Funding implications for the industry

Contractors may find it more difficult to access finance as providers re-assess risk following ISG’s collapse. Credit insurer Atradius has warned that trade credit insurance premiums may rise for all but the strongest contractors, with ripple effects down through construction supply chains.

The law firm Brodies has commented that there will be greater caution by bond providers on which contractors they will back and at what price, posing a further threat to the industry. Lenders are also expected to apply greater discretion in providing both short and long term finance.

The lessons from ISG

Prevalent as it may be across the sector and understandable as it is, chasing volume by underpricing bids for new work is an unacceptably risky strategy. The reality is that excess competition creates margins that are too slim to be sustainable. The industry needs to find a way of persuading clients that the lowest price is not always the best route to take in awarding work.

Construction management needs to understand that despite all the apparent mathematical justification and sophistication behind it, the valuation of contracts for accounting purposes is fundamentally subjective, which brings with it the responsibility to take a conservative and not an aggressive approach. This includes a duty to recognise problems and potential losses as soon as signs of problems occur. We will likely learn that ISG has followed Carillion in foundering on the rocks of fantasy accounting and management denial.

Just like Carillion, this failure will torpedo many otherwise viable smaller construction businesses and cause untold disruption for clients, especially those in the public sector. The industry and its financial advisers, especially its auditors, must find a way to prevent a third major financial tragedy.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.