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What is this blog about?
In this week’s blog, we look at the fall of ISG and what you need to know about this as a RICS APC candidate or Chartered Surveyor working in the construction sector.
This blog was the combined efforts of a number of Chartered Surveyors on our consultant team. A big thank you goes to them for their hard work!
If you have been personally affected by recent events, remember that LionHeart are there to provide you and your family with support; https://www.lionheart.org.uk.
Why is this relevant?
If you have been active in the UK construction industry over the past 20+ years, you have likely had a direct experience with ISG. They were one of the top 6 UK main contractors, with a turnover of approximately £2.2 billion and a diversified portfolio across various sectors.
ISG’s name is associated with high-profile projects, including the 2012 London Velodrome, the KPMG HQ, and the Nido Spitalfields, marking them as a significant player in fit-out, industrial, and manufacturing markets.
You may have been directly or indirectly affected by recent events, or you may have clients who have been or will be affected. Being aware of market events and how they affect you, your clients and the wider industry is an integral part of being a competent Chartered Surveyor.
About the historical context and legacy of ISG…
ISG was founded in 1989 as Interior Services Group, initially focusing on fit-out and interior design services before evolving into one of the UK’s largest construction and engineering companies. Over the years, ISG grew organically and through strategic acquisitions, which expanded its capabilities beyond interiors into broader construction markets, including industrial, retail, and high-profile public and private sector projects.
ISG positioned itself as a leader in the UK’s main contracting sector, providing services in both new builds and specialised fit-outs. Known for its innovative approaches, ISG was an early adopter of sustainable construction practices, integrating energy-efficient solutions and environmentally friendly materials long before sustainability became a mainstream demand.
The company also established a strong reputation for its fit-out expertise, becoming the preferred contractor for many high-end retail and office projects, particularly in London. ISG’s emphasis on quality and efficiency built trust with large clients. This reputation allowed it to weather several economic downturns and positioned it as a trusted partner for high-stakes projects.
So, how did a seemingly successful business go bust?
Concerns over ISG's cash flow had circulated for some time, with reports of late payments, no payments, and adversarial onsite behaviours affecting their supply chain.
However, ISG's messaging often reassured stakeholders that these issues were mere administrative delays.
A mix of industry-wide and global pressures accelerated these issues. Brexit had already contributed to labour and material shortages. On top of that, inflation surged globally in 2022 due to the combined effects of post-COVID-19 supply chain disruptions and geopolitical tensions, particularly Russia’s invasion of Ukraine.
The effect was substantial: construction material costs soared, with some commodities seeing price increases of 30-40%. In extreme cases, suppliers would only fix prices for a day. Lead times for materials, such as steel, stretched from 12 to 50 weeks. Contractors locked into fixed-price contracts with no fluctuation clauses found their margins rapidly eroding, and delays led to increased exposure to liquidated damages.
In response to these market pressures, suppliers began requiring advanced payments to secure manufacturing slots, resulting in negative cash flows for contractors. Many began taking on debt to bridge these cash flow gaps, leading to the financial instability seen across the industry.
2023: A year of increasing administrations
In 2023, construction administrations rose by around 30% year-on-year, with established names like Michael J Lonsdale and Buckingham struggling under the same pressures. Rumours about ISG’s financial health grew to the point that their parent company, Cathexis, issued a statement confirming their liquidity, while ISG executives publicly denied the rumours.
In industries like construction, once doubts about a firm’s financial health arise, they can be challenging to dispel, potentially leading to a ripple effect across the supply chain and industry trust.
Whilst it is important to keep an ear to the ground as a consultant, there is a very fine line between market knowledge and spreading rumours, which could impact the supply chain.
This is where Rules 3 & 5 of the RICS Rules of Conduct are so important;
Provide Evidence Based Advice;
In the Public Interest.
What is the likely impact on the supply chain and SMEs?
The insolvency of a major contractor like ISG has profound and far-reaching consequences on the supply chain, particularly for small and medium enterprises (SMEs) that rely heavily on timely payments to sustain operations. SMEs often operate with limited cash reserves and rely on the predictability of payments from main contractors. When a large contractor collapses, delayed or missed payments immediately threaten the financial stability of smaller firms, which may not have the resources to absorb such financial shocks.
The first impact on SMEs in ISG’s supply chain is typically cash flow disruption. Many subcontractors and suppliers work on fixed-cost contracts and must allocate substantial upfront costs for materials, equipment, and labour. When payments are delayed or defaulted upon, these smaller firms face immediate financial strain. Without steady cash flow, they risk insolvency, potentially leaving their own employees unpaid and projects stalled. The collapse of even one major contractor can thus trigger a domino effect, leading to financial distress for multiple businesses down the supply chain.
Beyond cash flow, the insolvency of a major contractor like ISG erodes trust within the supply chain, as subcontractors and suppliers become more cautious about engaging in similar projects in the future. To mitigate potential losses, some may demand higher upfront payments or shorten payment terms, which can make projects more costly and complex for other contractors. This cautious approach raises the barrier for entry into large projects and can limit opportunities for SMEs to participate in future high-profile construction work.
The broader economic effects of ISG's downfall also extend to financial institutions. Banks and creditors who provided loans or credit to SMEs based on anticipated future payments may find themselves exposed to higher default risks. This could tighten lending conditions for smaller firms across the construction industry, further restricting their financial flexibility.
The public interest and the role of surveyors
As Chartered Surveyors, it is essential to balance market knowledge with professionalism, especially given that rumour-spreading can harm the supply chain.
Rules 3 & 5 of the RICS Rules of Conduct are important to consider in this instance; they emphasise the importance of "Evidence-Based Advice" and acting "In the Public Interest," which applies here, as a large contractor’s collapse could trigger widespread economic effects.
The potential for job losses among ISG’s employees and the risk of unpaid invoices for the supply chain could ripple through the sector. This could lead to more insolvencies within an industry that consistently represents around 30% of the UK’s GDP, impacting the wider economy.
How could the profession have mitigated the risks?
Surveyors and consultants have several tools at their disposal that could have been employed to protect clients and the supply chain:
Financial Reporting & Due Diligence
Regular financial health checks on key contractors help clients understand the risks they may be taking on. Open communication during tender processes and throughout a live project allows for the development of proactive support mechanisms to ensure project success.
Periodic Rate Reviews & Fluctuation Clauses
Including these in contracts can foster collaboration and flexibility. If a project team is aware of extraordinary inflation such as that seen in 2022, the project team could suggest to the client to review the Schedule of Rates in line with market knowledge, so as a project team, principles of collaboration are implemented for the good of the project.
Protection Mechanisms: Collateral Warranties, Third-Party Rights, and Performance Bonds
Collateral warranties and third-party rights schedules offer some protection to clients and allow continuity in payments to the supply chain even if a Main Contractor fails. Performance bonds also help by ensuring financial resources are available to cover re-tendering costs or other restructuring efforts necessary to keep a project on track.
Advanced Payments & Advanced Payment Bonds
Construction projects often require significant outlays before costs are recoverable. Advanced payments, secured by advanced payment bonds, provide cash flow support to the supply chain while protecting clients’ interests in the case of insolvency.
Industry trends and shifts in contracting practices
Traditional contracting models, particularly fixed-price and lump-sum contracts, have long been the standard in the construction industry. These contracts place the responsibility for cost overruns and delays largely on the contractor, making them financially vulnerable when material prices surge, or labour shortages disrupt timelines.
Whilst the mitigation options discussed above can be used, the industry is also seeing a shift towards more flexible contracting models. Cost-plus contracts, which cover the cost of materials and labour with an added percentage for profit, provide greater adaptability as costs fluctuate, transferring a portion of the financial risk to the client. Similarly, target cost contracts establish a project budget but allow for adjustments if actual costs exceed the target, encouraging shared risk management and fostering collaboration among stakeholders. Partnering arrangements and collaborative contracting models promote joint decision-making, risk-sharing, and transparent communication, which can help manage cost uncertainties and improve project outcomes.
Case studies of similar companies
Examining case studies of similar companies that faced financial challenges can offer valuable insights into how construction firms can manage—or mismanage—financial risks.
One notable example is Carillion, which went into liquidation in 2018 after struggling with delayed projects, rising costs, and a series of unprofitable contracts. Carillion’s heavy reliance on fixed-price contracts, along with inadequate cash flow management and an aggressive bidding strategy, ultimately led to a liquidity crisis. In Carillion’s case, high levels of debt coupled with delayed payments to subcontractors created an unsustainable business model. The lessons from Carillion emphasise the need for realistic bidding, conservative financial planning, and transparent relationships with subcontractors.
In contrast, Laing O’Rourke managed to adapt to similar pressures by focusing on innovation, workforce development, and diversification. Unlike Carillion, Laing O’Rourke invested heavily in off-site manufacturing and digital construction technology, which improved cost control and project predictability. Additionally, by diversifying into international markets and avoiding a heavy concentration in fixed-price contracts, Laing O’Rourke reduced its exposure to market volatility. This contrast illustrates the importance of adaptability and a diversified business model in ensuring resilience.
Conclusions
As RICS members our standards of ethics come into every single decision and piece of advice we give to clients.
Our standards of behaviour to have significant impacts on the wider industry, and we should not take our role for granted.
Adhering to standards of evidence-based advice and resisting unverified rumours are crucial, as these behaviours can directly impact the industry’s wider stability.
The industry has moved beyond the adversarial construction practices of the 1980s. Collaborative contracting mechanisms are there to be used, and as RICS surveyors it is in the public interest to promote their use.
Acting in this way not only promotes trust in the profession, but it helps promote successful outcomes.
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N.b. Nothing in this article constitutes legal, professional or financial advice.