Could RiskTrace have saved ISG's £1bn collapse?

How the new Procurement Act can help you avoid it happening again

By Nicholas Sutherland 

The sudden collapse of construction giant ISG in September 2024 sent shockwaves through the UK public sector, leaving more than £1 billion worth of public contracts in limbo and 2,200 workers redundant. This catastrophic supplier failure raises important questions about how contracting authorities can better identify financial instability in their critical suppliers. The Procurement Act 2023, which came into force in February 2025, introduces several measures that might have helped public sector clients spot ISG's troubles before they reached crisis point.

Early Warning Signs in Supplier Financial Assessment

ISG's collapse, like many corporate failures, likely presented warning signs that went unnoticed or unaddressed. The construction sector has historically operated on thin margins with significant cash flow challenges, making rigorous financial assessment particularly crucial. Under the previous procurement regime, financial evaluations often focused narrowly on backward-looking metrics and minimum turnover requirements, potentially missing forward-looking indicators of distress.

The Procurement Act introduces a more robust framework for assessing suppliers' economic and financial standing. Section 58 of the Act explicitly permits contracting authorities to exclude suppliers who fail to meet specified economic and financial standing requirements, providing a clearer legal basis for thorough financial scrutiny.

Additionally, the Act's emphasis on transparency enables authorities to request more comprehensive financial information during both the selection process and contract management phases.

Concrete Measure: Cash Flow to Debt Service Ratio Assessment

One concrete measure that might have flagged ISG's deteriorating position is a requirement to regularly monitor the Cash Flow to Debt Service Ratio (CFDSR) during contract delivery. This ratio measures a company's ability to cover its debt obligations with its operating cash flow and would have been particularly relevant for ISG given construction firms' typical reliance on debt financing.

A robust Financial and Value-for-Money Risk Assessment (FVRA) under the new Act could have included a contractual requirement for ISG to maintain a CFDSR above 1.5 and to report on this metric quarterly. A falling ratio approaching 1.0 would have indicated that the company was generating just enough cash to meet its debt obligations—a precarious position. Had this been monitored, public sector clients might have observed a declining trend in ISG's CFDSR in the months preceding its collapse, prompting earlier intervention or contingency planning.

Enhanced Monitoring Through KPI Requirements

The Act's requirement for public authorities to set and publish a minimum of three KPIs for contracts valued at £5m or more would have created additional transparency around ISG's performance. By including financial stability metrics among these KPIs, clients would have established a formal mechanism for regular assessment of ISG's financial health.

Furthermore, the Act's mandatory 30-day payment terms provisions could have served as another early warning system. Delays in paying subcontractors often indicate cash flow problems at main contractors. By monitoring compliance with these payment terms, authorities might have detected ISG's financial difficulties as they began stretching payments to preserve cash.

Conclusion

The ISG collapse demonstrates the critical importance of rigorous and ongoing financial assessment of key suppliers. While the Procurement Act 2023 came too late to prevent this particular failure, its provisions offer contracting authorities powerful new tools to identify supplier financial instability before it reaches crisis point. By implementing comprehensive economic and financial standing assessments—particularly focusing on forward-looking metrics like the Cash Flow to Debt Service Ratio—public sector organisations can better protect critical services and public funds from the devastating impact of major supplier failures.