Contractor Insolvency and Development Finance: Protecting Your Scheme

Contractor insolvency is one of the most disruptive events that can affect a development finance project. The UK construction industry has one of the highest insolvency rates of any sector, with over four thousand construction companies entering insolvency proceedings in the twelve months to mid-2025 alone. This rate has remained elevated since the pandemic, driven by thin profit margins, rising material costs, skills shortages, and the lingering effects of fixed-price contracts agreed before the inflationary surge of 2022-2023.

For developers with development finance in place, contractor insolvency creates an immediate and acute problem. Construction stops, the site must be secured, and the developer must find a replacement contractor willing to take on a partially completed project — all while the facility clock continues to tick and interest accrues on the drawn balance. In our experience, contractor insolvency typically adds three to nine months to the build programme and increases the remaining build cost by fifteen to thirty percent.

The impact on the development finance facility can be severe. Programme milestones are missed, triggering potential covenant breaches. The cost to complete increases, potentially breaching LTC covenants and requiring additional equity or supplementary finance. The monitoring surveyor will flag the contractor insolvency as a material risk, and the lender's credit team will place the facility under enhanced monitoring. If the developer cannot demonstrate a credible plan for completing the project, the lender may move towards enforcement. Understanding how to manage this scenario is essential for any developer managing a financed construction project.

The moment you learn that your contractor has entered insolvency (whether through administration, liquidation, or a company voluntary arrangement), take the following steps immediately. First, secure the site. Ensure all access points are locked, scaffolding is safe, open excavations are fenced, and the site is protected from weather damage and theft. If the contractor's employees have left site, you may need to engage a security company to protect the works and materials. The cost of site security (typically £500 to £1,500 per week) is negligible compared to the cost of damage or theft.

Second, notify your lender or broker immediately. Do not wait until the next scheduled monitoring surveyor visit — call your relationship manager or broker the same day and follow up in writing. Explain what has happened, confirm that the site is secured, and outline your initial plan for appointing a replacement contractor. This proactive communication demonstrates that you are managing the situation and builds confidence with the lender.

Third, instruct your quantity surveyor to conduct an immediate assessment of the works completed to date, the works remaining, and the value of any materials on site. This assessment will form the basis of your revised cost-to-complete calculation and will be essential for negotiating with replacement contractors. The QS should also identify any retention or stage payments that were due to the insolvent contractor but not yet paid — these funds should be retained and used towards the cost of completing the works.

Fourth, review your building contract with your solicitor. The specific provisions regarding contractor insolvency vary between contract forms, but most standard contracts (JCT, NEC) contain termination provisions that allow the employer to terminate the contractor's employment upon insolvency. Your solicitor should confirm whether the termination provisions have been triggered automatically by the insolvency event or whether a formal termination notice is required. They should also advise on any retention bonds, performance bonds, or parent company guarantees that may be available to fund the cost of completing the works.

The lender's primary concern when a contractor becomes insolvent is whether the development can be completed at a cost and within a timeframe that allows the facility to be repaid. Your communications with the lender should address this concern directly. Prepare a comprehensive report that includes: the current state of the development (supported by the monitoring surveyor's latest report and your QS assessment), the estimated cost to complete with a replacement contractor, a revised programme showing the anticipated completion date, and a revised development appraisal demonstrating that the project remains viable.

The lender will likely instruct the monitoring surveyor to conduct an additional site visit to independently verify the state of the works and the cost-to-complete estimate. Cooperate fully with this visit and ensure the QS assessment is available for the monitoring surveyor to review. The monitoring surveyor's report will be the key document in the lender's credit decision, and a report that confirms the developer's assessment builds confidence, while a report that identifies additional concerns will make the situation more difficult.

If the cost to complete with a replacement contractor exceeds the remaining undrawn facility amount plus the developer's available equity, the lender faces a choice: increase the facility to fund the additional costs, or decline to provide additional funds and risk the development stalling. In our experience, lenders will usually agree to increase the facility if the revised development appraisal demonstrates adequate profitability and the developer is injecting additional equity to share the burden. We have negotiated facility increases of £100,000 to £500,000 in contractor insolvency situations, typically with a modest increase in the interest rate and arrangement fee to reflect the additional risk.

The key to maintaining the lender's support is demonstrating that you have a credible plan for completing the development and that you are executing that plan competently. Regular updates (weekly during the critical period of appointing a replacement contractor, reverting to monthly once the build has resumed) keep the lender informed and confident. If you are working with us as your broker, we will manage these communications on your behalf, framing the situation in a way that the lender's credit team will respond to constructively. Reach out through our deal room if you are dealing with a contractor insolvency on a financed project.

Finding and appointing a replacement contractor for a partially completed development is one of the most challenging aspects of contractor insolvency. The replacement contractor is taking on another firm's work — with all the attendant risks of unknown quality, incomplete documentation, and potential latent defects. This risk premium means that the replacement contractor's price will almost always be higher than the original contractor would have charged for the same remaining works, typically by fifteen to thirty percent.

The appointment process should be managed by the developer's project manager or QS, with the following steps. First, conduct a thorough audit of the works completed to date — including a defects survey, a review of compliance with the building contract specification, and a check that all works comply with building regulations. This information will be provided to prospective replacement contractors so they can price accurately and identify any remedial works required.

Second, obtain tenders from at least three suitable contractors. The tender documents should include: the original building contract specification, the QS assessment of works completed and remaining, the results of the defects survey, the revised programme, and the terms upon which the replacement contractor will be engaged. Allow a minimum of two weeks for tender return — rushing this process risks receiving inaccurate or inflated tenders that could cause further problems later.

Third, evaluate the tenders on the basis of price, programme, and the contractor's track record. The cheapest tender is not necessarily the best — a contractor who has experience of taking over partially completed developments and can demonstrate a realistic programme is more valuable than one who offers the lowest price but has no relevant experience. Check references, verify insurance, and ensure the contractor has adequate financial standing to complete the works. Your lender will also want to review the replacement contractor's credentials before approving the appointment, so factor this into the timeline.

Several financial instruments can protect developers against the cost consequences of contractor insolvency. The most common is a performance bond, which is a guarantee from an insurance company or bank that the contractor will perform its obligations under the building contract. If the contractor fails to perform (including due to insolvency), the bond pays out to the employer, typically up to ten percent of the contract value. On a £1,500,000 building contract, a ten percent performance bond provides £150,000 of protection at a cost of approximately £4,500 to £7,500.

A parent company guarantee (PCG) provides similar protection but from the contractor's parent company rather than a third-party insurer. If the contracting entity becomes insolvent, the parent company is liable to complete the works or fund the additional costs of completion. PCGs are only available where the contractor is part of a larger group, and they are only as valuable as the parent company's financial standing. A PCG from a financially strong parent company is an excellent protection; a PCG from a parent company that is itself in financial difficulty provides little comfort.

Retention provisions in the building contract also provide a degree of protection. Under standard JCT contracts, the employer retains a percentage of each interim payment (typically three to five percent) as security against defects. If the contractor becomes insolvent, the retained funds are available to the employer to fund the cost of completing outstanding and remedial works. On a £1,800,000 contract with five percent retention, this provides £90,000 of protection.

Collateral warranties from key subcontractors provide an additional layer of protection. If the main contractor becomes insolvent, collateral warranties allow the employer to engage key subcontractors directly to continue their works without interruption. This can significantly reduce the disruption caused by contractor insolvency, as the employer can maintain continuity of specialist works (mechanical and electrical, for example) while appointing a new main contractor to manage the general works. We always recommend that developers obtain collateral warranties from key subcontractors at the start of the project — the cost is minimal (typically £500 to £1,000 per warranty) and the protection is significant. For broader guidance on protecting your facility, see our guide on avoiding default on development finance.

Contractor insolvency has immediate implications for the insurance arrangements on the development. The contractor's all-risks insurance and public liability insurance will typically cease upon insolvency, leaving the site uninsured if the developer does not have their own policy in place. Check your building contract to determine who is responsible for maintaining insurance — under JCT Design and Build contracts, the responsibility depends on which insurance option was selected at the outset.

If the contractor was responsible for maintaining insurance, the developer must arrange replacement cover immediately. This should include: contract works all-risks insurance (covering the partially completed building and materials on site against damage from fire, storm, flood, and other perils), public liability insurance (covering claims from third parties injured on or near the site), and employer's liability insurance (which will be required once a replacement contractor is appointed). The cost of arranging replacement insurance typically ranges from £3,000 to £10,000 depending on the project size and the remaining term.

Notify your lender immediately if there is any gap in insurance coverage. Most development finance facilities contain insurance covenants that require continuous coverage, and a lapse — even for a few days — constitutes a covenant breach. Arrange temporary cover from a specialist construction insurance broker if necessary to ensure continuity while permanent replacement cover is put in place.

If the development has suffered damage or deterioration during the period of contractor insolvency (for example, water ingress through an unfinished roof, or vandalism on an unsecured site), investigate whether a claim can be made under the existing insurance policy. The policy in force at the time the damage occurred should respond, even if the contractor who held the policy has subsequently become insolvent. Contact the insurer directly (not through the insolvent contractor) and notify them of the claim as soon as possible. Insurance claims in contractor insolvency situations can be complex, and a specialist insurance broker can assist with the claim process.

While contractor insolvency cannot always be predicted, there are steps developers can take to minimise the risk and mitigate the impact. The most important step is thorough due diligence on the contractor before appointment. Check the contractor's financial accounts (available from Companies House), assess their credit rating through a commercial credit agency (a report costs approximately £30 to £100), take references from recent clients, and verify their insurance and bonding capacity. A contractor who is thinly capitalised, has declining turnover, or shows increasing debt levels is at higher risk of insolvency.

Structure the building contract to minimise your exposure. Use stage payments tied to verified milestones rather than monthly valuations, which reduces the risk of overpaying for incomplete work. Ensure retention provisions are included and enforced. Require performance bonds or parent company guarantees as a condition of the building contract. And include termination provisions that give you clear rights to terminate the contractor's employment and engage a replacement if the contractor enters insolvency proceedings.

Monitor your contractor's financial health throughout the build programme, not just at the appointment stage. Signs of financial distress include: requests for advance payments or accelerated invoicing, a slowdown in the pace of works without clear explanation, subcontractors and suppliers contacting you directly about unpaid invoices, and a reduction in the number of operatives on site. If you observe any of these warning signs, investigate immediately and begin contingency planning for a potential contractor change.

Finally, maintain a relationship with at least one alternative contractor who could step in at short notice. This does not require a formal standby arrangement — simply maintaining contact with another contractor who is familiar with your project and could provide a rapid tender if needed. Having this contingency in place can reduce the delay caused by contractor insolvency from months to weeks, which can make the difference between a manageable disruption and a facility default. If you need advice on managing contractor risk within a development finance facility, contact our deal room for a confidential discussion.