Suddenly, they find themselves dealing with invoices that may never be paid, and unfinished projects.

Towards the end of 2024, UK-based contractor ISG, one of the largest in the country, collapsed while holding more than 拢1billion (US$1.25 billion) worth of government contracts. More than 2,000 workers lost their jobs and many smaller companies within the supply chain were told they would not receive money they were owed.

While ISG鈥檚 demise was dramatic and had wide-ranging implications, it did not come as a complete surprise - rumours about the company鈥檚 ailing financial health had been swirling for months beforehand.

While there are no certainties, there are signs to look out for that indicate a contractor is likely to be in good financial health, according to Gareth Belsham, director of UK-based Bloom Building Consultancy. There are also plenty of red flags to watch out for too, he asserts.

Would-be clients and subcontractors may think that the place to start would be a contractor鈥檚 financial accounts. But they give away very little useful information, says Belsham. For a start, it is only when companies hit a certain size or are publicly listed that they have to divulge meaningful figures for annual turnover, profit and loss in many countries.

But even if those figures are available, they are a lagging indicator that provides a snapshot of where the company stood 12 months or more ago 鈥� not what their current situation is, he says.

鈥淭hings can change overnight in construction. The most important thing for subcontractors to look for, for example, is a healthy cashflow,鈥� says Belsham. 鈥淵ou get no sight of that in the annual accounts. It鈥檚 a historic picture that may or may not be accurate.鈥�

What to look out for

Instead, he recommends taking other considerations into account like the longevity of a company, the size of its order book (without overtrading and stretching themselves too thin), a stable workforce, ready access to materials, and strong supply chain accounts with suppliers.

They should also have a strong administrative base, with the clear ability to process valuations, deal with contracts and so on.

鈥淎 lot of it is reputational. There needs to be a willingness to contract and to be bound by the terms of that contract. A key part of that is payment terms,鈥� he says. 鈥淚f they are asking for extended payment terms of 60 or 90 days then you know they are stretching their cash flow and more importantly that they will attempt to stretch your cash flow too,鈥� he says.

Part of Belsham鈥檚 work also involves being called into residential projects that have gone wrong, either to try and turn them around or work with insolvency practitioners. In fact, it鈥檚 a growing market: a present, Bloom Building Consultancy is working on 拢300 million worth of projects that got into difficulty and 36% of all the revenue the company has booked for next year comes from distressed asset recovery work.

鈥淭here鈥檚 really only one thing that puts projects into distress and that is when the costs overrun, whether by delay, not getting the contract sum right and getting costs in a muddle either from the outset or throughout the flight of the work,鈥� he says. 鈥淥nce you go past the tipping point where there鈥檚 not enough money in the facility to finish the project, that鈥檚 when the red flags go up.鈥�

No matter where you sit in the supply chain, Belsham believes that his mantra of 鈥淎BC鈥� applies: 鈥淎ssume nothing, believe nobody, check everything.鈥�

In a different subsector of the industry 鈥� utilities 鈥� Jonathan Hopkins, managing director of UK-based contractor BGS Utilities recommends using third-party services as a way of running the rule over prospective clients before taking the plunge and signing a contract.

鈥淪peaking from the point of view of a small-to-medium-sized enterprise (SME) and a company that doesn鈥檛 have the luxury of forensic accounting services or a dedicated triage team, we rely on software-as-a-service (SAAS) systems such as CreditSafe for client prospecting and it isn鈥檛 something to be sniffed at鈥� Hopkins explains.

He also urges subcontractors and contractors to avoid taking on risk unnecessarily because the organisations they work for don鈥檛 have a clear enough understanding of what their work involves and to make sure they clearly understand the agreement they are entering into.

鈥淥ur industry [utility infrastructure] is a sector which is generally misunderstood and fiercely competitive. Because the intricacies of our work are often overlooked, contractors regularly experience unnecessary delays, variations, and shoulder risk which isn鈥檛 theirs,鈥� he says.

鈥淪o, when you choose your utility infrastructure provider, ask questions, be curious and make sure you understand what they鈥檙e proposing, because then, aside from any financial assessment which might have been carried out, you may well save yourself a lot of time, stress and money.鈥�

10 red flags that suggest a contractor is in trouble

Gareth Belsham has put together a list of 10 red flags to look out for that suggest a main contractor could be in financial trouble. They are:

1) Have the main contractor鈥檚 direct employees not turned up for work or is there a decrease in labour on site?

2) Is building work slowing down substantially or have plant, equipment and materials 鈥渄isappeared鈥� from site?

3) Have subcontractors like electricians, carpenters and plasterers not been paid?

4) Is completed work increasingly defective or of a sub-standard quality?

5) Has the contractor attempted to negotiate further payments from the client, release retentions or seek changes in payment patterns?

6) Did they make spurious or unjustified claims or contra-charges to hike up the contract cost?

7) Have they assigned, or attempted to assign, the proceeds of the building contract to a bank or other creditor?

8) Are they late filing accounts or annual returns?

9) Does the contractor have unsatisfied court judgments or is there anecdotal evidence about their financial position?

10) Has the contractor鈥檚 parent company, or other companies in the same group, displayed the warning signs listed above?