Today Barbour ABI’s Head of Business and Client Analytics, Ed Griffiths, hosted a live briefing highlighting the ISG administration and the immediate impact on the UK construction industry.
Hosted by our Marketing Director, Kate Perrin, this briefing was open to the entire industry and we’ll be continuing the ISG Administration Bulletin series by releasing more documents in the weeks to come highlighting ongoing impacts.
Why ISG Collapsed: A Summary
On the 20th of September 2024, ISG, the sixth largest construction firm in the UK, entered administration. Thousands of employees have been affected as well as hundreds of subcontractors and more throughout the industry.
Barbour ABI works closely with many of these subcontractors. We’re here to help and we hope that all those involved can weather the storm.
The collapse of ISG has been one of the most prolific since Carillion entered administration in 2018.
Recently featured in the BBC, Ed restated his quote:
“The last time we saw a Tier 1 main contractor go under (Carillion in 2018), schemes such as the Royal Liverpool and Midland Metropolitan Hospitals were delayed by up to seven years and the extra cost of delays needs to be factored in”
During the webinar, Ed highlighted the key points as to why ISG collapsed:
- Unfavourable trading conditions
- Average material costs is 52% up from 2018
- Brexit
- Labour pool: unskilled and skilled worker shortages
- Failure to bring on external investment
Profit vs Turnover Analysis
ISG has struggled to realise margins of more than 1% in the pictured 4-year period post Covid-19. The analysis highlights the difficult nature of operating in the construction industry where margins are razor thin and suggests further risks may exist beyond ISG.
The red line represents the 3% profit margin contractors typically operate around in the UK construction industry. Each dot on the chart represents the top 100 contractors in the industry, and each contractor appears 4 times on the chart to represent the years 2021-2024.
Notice the 3 dots enclosed within the polygon in the chart above. These were ISG’s operating positions from 2021-2024. Though the chart shows that ISG were able to increase profit margins throughout this time period, they were still operating far below a 3% margin throughout the entirety of this period.
As Ed concluded this graphic mentioned a significant elephant in the room:
There are a lot more dots under the line than above it.
ISG Bidding History
ISG consistently bid for over £1.18bn per year across the built environment with a win rate of ~25%, however we have seen this steadily decline since 2021.
Each data point in this graph represents the bidding ISG tendered for years 2017-2024, excluding direct awarded.
In 2021 ISG bid for higher value projects such as the Shepperton Studios valued at £300m, and Data Centres in London and Heathrow valued at £575m. It seem as though 2021 was a bit of an anomaly in terms of win rate.
Ed highlighted that it’s worth noting that in-line with their struggle they also saw their win rate dropping below their previously average rate of 25%. In 2024 their win rate reduced to 16% further highlighting the difficulty in trading.
ISG Pipeline by Start Date
The at-risk projects that ISG had been awarded that are yet to start have a value of £934m and a further ~£3.1bn are onsite and will require completion bids and/or extensive tender processes.
Ed emphasized that there are hundreds of subcontractors who are being left in the cold with materials and equipment on sites in need of collection, due to the collapse.
When major contractors go bust, large projects such as prison works and commercial developments historically hit big delays. Recall Royal Liverpool Hospital and Midland Metropolitan University Hospital and their delays due to Carillion’s collapse.
ISG Pipeline by Sector
The Industrial and Infrastructure sectors have the largest exposure of onsite or to-start pipeline; this will impact the Government substantially due to ISG’s involvement across many HMP projects as well as significant XLCC Subsea Cable Manufacturing Site.
Sector highlights:
- Commercial: a vital sector, but little future exposure from the collapse in 2025
- Education: relatively consistent in their pipeline of 220m on site, include RAAC concrete work repairs and replacements.
- Infrastructure: substantial impact on prison works, as ISG had been successful in winning several prison contractors from the government.
Regional Exposure
Scotland, the South East and London represent the largest exposures when considering onsite and planned works. Scotland’s exposure is limited to only 3 projects outside of the XLCC Cable Factory. Other regions present opportunities because of the volume of works.
The South East and London will be crucial to watch due to their high proportion of prisons and data centres and commercial projects.
Consequences of XLCC Site
The XLCC Cable Factory is a substantial site and the consequences go beyond ISG’s administration. The UK has lofty aspirations to achieve up to 50 gigawatts (GW) of offshore wind by 2030.
107 Offshore Windfarms are in the current pipeline which require substantial infrastructure including Subsea Cable, used for connection to the array and export connections. By 2030 the offshore wind capacity is expected to reach 40GW making the UK the world’s leader in offshore wind power.
XLCC have released a statement to state that ISG’s involvement was confined purely to a “pre-construction service agreement” and that ISG’s work was finalised by April 2024. XLCC have stated that there should be no impact on their future plans for the project and they expect to tender shortly.
“XLCC will establish a new, export-led, green industry in the UK, a world class HVDC subsea cable manufacturing location.”
HMPPS Pipeline: A Challenge for the Nation
There are around 6,000 spaces left in prisons across the whole of the UK.
The UK prison system is in crisis operating at 97% capacity, there are much needed works delayed suggesting urgent intervention is desperately needed.
As it stands, Barbour ABI data shows that there are two prison projects on ISG’s books:
Both of the above projects will need re-tendering and may require government intervention due to the severe need in prison improvements as well as new stock.
What’s next?
Barbour ABI is releasing a free bulletin series to help keep you up to date on the impact of the ISG administration.
Until then, there are some key insights to note:
Outlook:
- Forecasts across the industry are expected to worsen with outlook looking more pessimistic
- Output will likely depend on how project recovery progresses in the coming weeks
- Early signs of several Tier 1 Contractors moving to support and pick up work which could mitigate and bolster sentiment
Impact:
- Expect Re-bid and Completion processes to commence but will be over a protracted period
- Carillion projects saw substantial delays and overspend stemming from initial bust
- Estimates of as much as £700m of impact in the supply chain
- Insolvencies at an all-time high exceeding 4000 in the last 12 months could drive increased risk aversion among subcontractors
Action:
- The collapse of ISG will become one of the first enquiries of the Commons Business and Trade Select Committee, its Labour chairman, Liam Byrne, has indicated
- Industry leaders vocalising that legislation would be welcomed to support and protect against future high impact events such as Carillion or ISG
- Failure to act following Carillion’s issues in 2018 paints a difficult picture for any acting government going forward
ISG Administration Impact Bulletin from Barbour ABI
Barbour ABI will be providing a free bulletin series for project specific and macro-market analysis of how the ISG administration will impact the UK construction industry.
Sign up today for free and we’ll send the next bulletin release straight to your inbox.
