ISG collapse: At times like these, firms should consider how to make themselves more robust

This has not been an easy few years for the construction industry and the collapse of ISG last week is just the latest in a series of setbacks. The covid pandemic, the shortage of HGV drivers, extreme material price inflation, an acute shortage of skilled labour and the need to adapt to much needed but increasing regulations have all put enormous pressure on firms big and small right across the sector.

Of course the level of that impact on each business has varied depending on the nature of their project portfolios, their contracting terms and pre-event financial resource buffers – determining the levers that leadership have been able to respond with. If you are locked into a contract, you have to keep trading through and potentially use up reserves. 

Businesses always come and go with economic cycles. Construction businesses in the UK deliver complex outcomes. In general they do a pretty good job, however there is scope for all businesses in the sector at this point to take a look at how they can make themselves more robust. 

Sadly government and private customers at a minimum are going to see delays to the projects as a result of the failure at ISG. As we saw when the Buckingham Group went into administration, there will be additional costs associated with new businesses picking up and familiarising themselves with ISG contracts, as well as the need for some potential renegotiation.

We are all too familiar with the domino effect of collapses in the sector. Financial resilience and controls weaken down each layer of contracting

This will be a difficult time for ISG employees and their families. In the short term the collapse is going to mean change for all of them. However, with the inevitable re-contracting of projects and the under-supply of talent within the sector, one would hope to see these individuals gainfully employed again quickly for both their knowledge of the ISG projects and their general skill-sets.

My greatest concern lies with the supply chain. We are all too familiar with the domino effect of collapses in the sector. Financial resilience and controls weaken down each layer of contracting.

Will the subcontractors have the liquidity to survive and, if they cannot, what impact will their collapse have on those below them? On the other projects that they are working on and of course on the employees within their own businesses?

Of course this is not the sector’s first experience of a collapse on this scale and I would expect at a time like this the wider industry to display the same maturity that it has shown in the past to minimise the wider impact.

Construction is a broad sector with outcomes ranging from complex infrastructure to the development of residential schemes for hundreds of inhabitants. Margins and growth prospects vary from business to business based on where they play in the value chain and their project portfolio mix. Investors looking to enter or grow their investment in the sector should make sure that they do their due diligence around both business models and operating models.

Investors should be clear about how any acquisition or investment will translate into sustainable bottom-line performance

But, despite this and other recent setbacks, the UK market is still very much of interest to foreign investors. Many of the listed businesses in the sector have been showing strong share price growth over the past 12 months while other parts of the market are being driven by the transition to greener energy and the demands of data usage, direct to customer warehouses and new-technology industries.

Top-line growth in many sub-sectors has increased for several years and continues to do so with demand outstripping supply. But investors should be clear about how any acquisition or investment will translate into sustainable bottom-line performance.

Driving an uplift in the overall productivity level is at the heart of the challenge faced by the modern UK contractor. At KPMG we are seeing businesses in the sector revisiting the assumptions of their risk management, designing new ways of working and increasing the use of technology to improve controls, make more use of data and reduce the effort required for low-value tasks. 

This is not an easy task and some would say the system is broken and requires intervention greater than one contractor can deliver. We can but hope that better times lie ahead. 

Andrew Glider is UK head of infrastructure, building and construction at KPMG