The fall into administration of UK contracting group ISG bodes ill for the world of large-scale construction and raises questions about how the industry’s present business model can be sustained.
The largest UK contractor to collapse since Carillion entered administration in 2018, ISG has ceased UK operations and laid off the vast majority of its 2,400 employees. Owned by a US investment firm, the company made the equivalent of $15.3 million in profit on $2.9 billion in revenue in 2022, according to the most recent figures available. Despite more recent profitability, it was ultimately brought down by losses on a variety of large contracts, across a number of sectors, agreed between 2018 and 2020.
Attempts to refinance were unsuccessful, while potential purchasers of the business struggled to secure funding. This no great surprise when a contractor tries to exit the market: often, there are no viable parts of the business to sell; the contracts are certainly not meaningful assets to borrow against.
Carillion, the UK’s second contractor at the time of its demise, had shone a light on the industry’s precarious business model of gigantic projects yielding meagre profits. Juggling complex contracts spanning a range of activities and markets is testing even for the world’s most talented management. Add in projects going wrong, and the outlook quickly becomes bleak. But the tipping point for Carillion was different: its debt profile and pension deficit were for a long time wholly inconsistent with its business model. Delivering a net margin of 3% on 2016 sales of more than £4bn left hardly any wriggle room once interest payments and an unrealistic dividend policy were serviced.
This earlier collapse also showed that being an aggressive consolidator, embarking on a spree of acquisitions, offers little protection from the flawed workings of the contracting sector. Adding diversity can make an enlarged business even harder to manage, while possibly encouraging an unrealistic view of growing the top line. None of it helps margin growth, cash flow or risk management longer term. It also shows that contractors which have borrowed to expand may have perpetuated the cycle of inexplicably low tenders for large contracts, possibly just to keep the cash circulating.
The ISG situation has prompted construction leaders and trade bodies to bemoan the perennially high risk/margin imbalance. They say that inappropriate transfer of risk to elsewhere in the supply chain, and unsustainable profit margins have been accepted by contractors for too long. Construction remains undervalued and the costs underestimated.
Business failures in contracting inevitably leave a long tail of subcontractors and suppliers out of pocket, wholly or in part. The reverberations of ISG’s insolvency are likely to be felt far and wide.
Written by Alice Fanner, Assistant Manager at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.