A main contractor going into administration doesn’t announce itself with a formal notice first thing in the morning. More often it’s a site manager who stops answering calls, a subcontractor ringing the employer directly because they haven’t been paid in six weeks, or a credit insurer quietly pulling cover. By the time the formal insolvency event lands – administration, liquidation, a CVA – the QS is usually already the person everyone is waiting on to say what happens next: to the works, to the money owed either way, and to the materials sitting half-fixed on site. Getting the first 48 hours right matters more than almost anything else in the life of the project.
Suspension, not automatic termination
The first thing worth correcting in your own head, and in whatever you tell the project team, is that insolvency does not end the contract by itself. Under JCT 2016 forms, the contractor’s obligation to carry out the works is automatically suspended the moment it meets the contract’s insolvency definition, and the employer’s obligation to make further payment is suspended too – but the contract itself carries on until someone actually terminates it. The employer has the right to terminate by notice, not an automatic right that fires on its own, and terminating too early, before the contractual insolvency trigger is actually met, risks turning your termination into a repudiatory breach that hands the other side a claim. NEC4 contracts work on the same logic through their own list of termination reasons (the insolvency-related R11 ground), which the Client may elect to invoke rather than being forced into automatically.
That gap between “entitled to terminate” and “automatically terminated” is where a QS earns their fee. Before recommending termination, check what you’re actually sitting on: is there a performance bond or parent company guarantee in place and still valid, are collateral warranties or third-party rights executed in case a funder wants to exercise step-in rights rather than see the contract terminated outright, and what retention is currently held. Termination is a lever, not a reflex – sometimes a stop-and-assess, or a negotiated novation to a new contractor, protects the programme better than pulling the plug immediately.
The ipso facto trap further down the chain
Since the Corporate Insolvency and Governance Act 2020 inserted section 233B into the Insolvency Act 1986, UK subcontractors and suppliers generally cannot terminate, or even threaten to terminate, a contract purely because the party above them in the chain has entered administration, liquidation or a moratorium – and that applies even where the right to terminate arose before the insolvency event. In practice this means a subcontractor can usually be compelled to keep working for an insolvent main contractor’s project, which is exactly the scenario a QS administering that subcontract needs to flag early, because a subcontractor forced to keep supplying a customer that can’t pay is a cash-flow problem waiting to surface. The main contractor’s own right to terminate an insolvent subcontractor is unaffected – the ban only removes the supplier’s side of that right, not the customer’s.
There are real escape routes from the ban: small suppliers below certain turnover, balance sheet and headcount thresholds are exempt, the insolvent party’s administrator or liquidator can consent to termination, and a court can release a supplier that can show continuing would cause it genuine hardship. None of those routes are automatic, though, and the court option carries its own cost and delay – which is exactly why due diligence on a subcontractor’s financial health at tender stage still matters more than relying on a termination clause to bail you out later.
Materials on site: the retention of title problem
An insolvent contractor’s administrator will often claim that unfixed materials and goods sitting on site belong to the contractor’s estate, available to help pay its creditors. Whether that’s actually true depends on a question most QSs never think about until it’s urgent: has title to those goods actually passed? A retention of title clause (sometimes called a Romalpa clause, after the 1976 case that established the principle in English law) lets a supplier keep legal ownership of goods it has delivered until it’s been paid in full – meaning materials sitting on your site, already incorporated into the contractor’s valuation and possibly already paid for by the employer, might still legally belong to an unpaid supplier two tiers removed from the contract you administer.
Most standard forms try to deal with this by making the passing of title to the employer a condition of including the value of unfixed materials in an interim certificate, but that only protects the employer if it was actually checked at the time – not retrospectively. On an insolvency, a QS should move fast to physically secure the site (most forms expressly allow the employer to take reasonable steps to protect the works and keep unfixed goods and materials on site), identify what’s been paid for versus what’s merely been valued, and get a clear answer on retention of title before assuming anything on site is “yours” by virtue of having certified it.
Bonds, retention and what’s actually recoverable
Once the position on the works themselves is stable, the financial clean-up starts. On-demand bonds can usually be called quickly; conditional bonds and parent company guarantees typically require you to first establish a breach and a quantified loss, which takes longer and is exactly why a QS should start pulling together the cost-to-complete evidence the moment insolvency looks likely rather than after termination has already happened. Any retention held doesn’t simply get paid out or kept in isolation – it feeds into the final account calculation the contract requires after termination: properly incurred completion costs, direct loss and damage caused by the termination, amounts already certified and paid, and what would have been due under the original contract all go into one balance, which can come out owed either way depending on how costly the recovery turns out to be. That final account exercise follows broadly the same discipline as agreeing a final account on a contract that completes normally – it just starts from a much messier set of numbers and usually under far more time pressure.
Keeping the project moving
Terminating isn’t the only way forward, and it isn’t always the fastest one back to a finished building. The realistic options a QS should be costing out in parallel, from the moment insolvency looks likely, are usually:
- Step-in – a funder or, less commonly, a purchaser exercises rights under a collateral warranty or third-party rights schedule to take over the employer’s position and keep the existing contract running, rather than losing it along with the employer’s insolvency (or, in reverse, keep a stalled contract alive when the contractor’s own funder steps in).
- Novation – the administrator or liquidator and the employer agree to transfer the contractor’s rights and obligations to a new contractor, which can be quicker than a full re-tender and sometimes suits the insolvency practitioner too, since it can realise value from an otherwise-abandoned contract.
- Termination and re-tender – the slowest route, but sometimes the only realistic one where trust has broken down entirely or the original contractor’s team has already dispersed.
- Direct payment to subcontractors – where critical subcontractors are owed money by the insolvent main contractor but are willing to keep working, some employers pay them directly against a deed of assignment or direct warranty, trading a short-term cash outlay for keeping specialist trades on site and out of the liquidator’s general pot.
Whichever route gets chosen, a QS’s job is to cost each one honestly, including the ones nobody wants to pick, before the decision gets made under pressure.
The Australian position
Australia runs a different insolvency regime but lands on remarkably similar practical problems. A head contractor typically enters voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth) rather than the UK’s administration/liquidation split, with the collapses of major contractors including Probuild and Condev in 2022 putting the issue squarely in front of the industry. Security of payment legislation, which exists in every state and territory in some form, has created its own genuinely open question: whether an insolvent contractor can still validly serve a payment claim and obtain an adjudication determination against the principal while in administration. Case law (including the Probuild administration itself) has generally allowed it, on the view that security of payment schemes exist precisely to keep cash flowing down the contracting chain regardless of a party’s solvency – though actually enforcing a resulting debt once you have it is a separate, harder problem.
A QS working on Australian projects also needs to watch for unfair preference exposure under section 588FA of the Corporations Act: a payment an insolvent contractor made to a subcontractor or supplier shortly before entering administration can potentially be clawed back by a liquidator as a preference over other creditors, which is a real risk for any party that got paid suspiciously promptly just before a collapse became public. Project trust account and retention trust regimes, most developed in Queensland (as covered in our piece on retention), exist specifically to ring-fence subcontractor money away from a head contractor’s general insolvency pot – a structural protection the UK has debated for years without ever properly adopting outside the construction retention deposit scheme discussions.
None of this is a reason to treat insolvency as unmanageable. It’s a reason to know, before it happens on your project, exactly which bonds you hold, whether title to the materials on your site has actually passed, what your retention is doing, and which of step-in, novation or re-tender actually gets the building finished fastest. The legal mechanics differ by jurisdiction and by contract form; the discipline of having that information ready doesn’t.