The news that the UK operations of ISG, the UK’s 6th largest1 construction company have stopped and that the related companies have gone into administration is devastating for their staff, supply chain, clients and for the projects they were delivering. It also marks a major blow to an already fragile UK construction market tasked with delivering £750bn+ of UK public infrastructure investment needed over the next 10 years.
It is reported2 that ISG was on site on projects worth £1.7bn with a pipeline of a further £1.9bn. They have successfully delivered significant public sector schemes, including MOJ’s prisons upgrades and construction programme3 alongside private sector schemes for Apple, Barclays and Google.4
Impact
I recently wrote an article on mitigating supply chain challenges which called for a shift from traditional fixed price, high risk, low margin contracting to adopting long-term collaborative, shared risk and reward models like alliancing or partnering – ensuring major projects are delivered by maintaining a profitable and flourishing supply chain. Whilst we cannot speculate on the reasons for ISG's ultimate demise, we do believe that a more collaborative approach to risk transfer, early identification and resolution of issues and a collective outcomes based delivery model is important to ensure clients and the wider supply chain discuss and manage risks in a timely manner and avoid a "blame" culture. This is best achieved through more collaboration and reimbursable pricing models with appropriate incentivisation.
The collapse of ISG will not only impact the clients that they are delivering for, but it is likely to have financial consequences on their Tier 2, 3 and 4 supply chains, who are critical to delivering our pipeline of investment. The wider supply chain will have outstanding project debts, most notably MEP suppliers who often hold major stakes in Tier 1 projects and who have been overstretched for some time. It is worth noting that reports suggest ISG owed more than £700m to its supply chain in its most recent accounts.5
What needs to change
Providing better protection to Tier 2,3 and 4 suppliers is in everyone's interest and this should be done by giving them a ‘seat at the table’ with clients through an alliance or partnership to facilitate joint decisions. Clients can also take more direct intervention by:
- mandating that specific terms are passed through to these suppliers (or not as the case may be) to set a fair risk position,
- setting up their own Tier 2/3/4 frameworks to allow Tier 1’s to contract;
- mandating use of project bank accounts; and
- monitoring compliance of fair payment terms.
At the very least, better visibility of these suppliers, the procurement approach and ultimate contract terms will go some way towards mitigating the risk. The new transparency requirements under the Procurement Act 2023 could go some way to support this for public sector spending.
The loss of a major Tier 1 contractor employing ~2400 employees6 directly and supporting thousands more jobs in the wider supply chain puts further pressure on the workforce capacity needed across the industry to deliver the UK construction and Infrastructure pipeline. It also serves to stress the importance of major projects mitigating their supply chain challenges and setting a fair risk and reward position with those suppliers typically not visible to the client.
We invite you to join us in rethinking infrastructure commercial and procurement approaches and start to build collaborative relationships with all tiers of your supply chain.
Reach out to Romi Alboreto to find out how we can help you navigate supply chain challenges and set your projects up for success. You can also visit Commercial advisory and assurance for more information.
Sources: Construction News, Sky News, Construction Enquirer, The Times, Barbour ABI
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