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Sub-contractor collateral warranties — why they matter when contractors become insolvent

AuthorsZoe Pond

3 min read

Property & Construction, Insolvency & Restructuring

Yellow safety helmet rests on a metal surface in the foreground, while a sunlit group of workers in hard hats discuss plans at a construction site.

Contractor insolvency remains a significant risk across the construction industry. According to the Government’s published insolvency statistics, 3,950 construction businesses entered insolvency during the 12 months ending November 2025.

The importance of obtaining collateral warranties from key sub-contractors therefore shouldn’t be underestimated. What may appear to be an unwelcome project cost at the outset can prove to be a valuable safeguard if things go wrong further down the line.

Here, Zoe Pond explores why sub-contractor collateral warranties still matter, how they can preserve a right of recourse and project momentum and where they fit alongside due diligence and performance security.

 

Do you need sub-contractor collateral warranties?

In a market where design and build contractors frequently assume responsibility for the entirety of a project's design, some parties regard sub-contractor collateral warranties as unnecessary. However, the insolvency of a main contractor can leave a significant gap in contractual protection and expose employers, funders, purchasers and tenants to substantial financial risk. 

While an employer may retain contractual claims against an insolvent contractor, recovering losses can be difficult, expensive and time-consuming, particularly where the contractor's assets have been depleted or administrators have been appointed. At the same time, much of the design and construction work will often have been carried out by specialist sub-contractors operating one tier below the main contractor in the supply chain.

 

How do collateral warranties provide protection?

The primary purpose of a collateral warranty is to create a direct contractual relationship between the party with an interest in the completed property and the relevant sub-contractor(s). They enable claims to be brought directly against the party responsible for defective design or workmanship. A modest investment at the outset of a project can therefore provide valuable protection years later, particularly where latent defects emerge after the main contractor has ceased trading or become insolvent.

 

The practical benefits following insolvency

Beyond providing a route to recovery for defective design or workmanship, collateral warranties can also deliver practical advantages following a contractor insolvency. 

Step-in rights may allow a beneficiary to maintain project momentum by engaging directly with a key sub-contractor, reducing delay and avoiding the cost and disruption associated with procuring replacement contractors. 

In addition, collateral warranties commonly provide for a 12-year limitation period from main contract practical completion, offering beneficiaries a potentially valuable route to recovery long after the main contractor insolvency event itself.

 

How warranties fit with due diligence & performance security

Although collateral warranties shouldn’t be viewed as a substitute for financial due diligence or performance security, they continue to play an important role in managing project risk. In an uncertain market, they provide an additional layer of contractual protection and a direct path to recourse against those carrying out the design and construction work when the unexpected occurs.

 

Talk to us

Our construction team has significant experience in negotiating and drafting collateral warranties and related reliance arrangements, helping developers, funders, purchasers and tenants to secure direct contractual rights against contractors, sub-contractors and professional consultants while managing construction and insolvency risk.

To discuss how we can support you, call 0333 004 4488, email hello@brabners.com or fill in our contact form.

Zoe Pond

Zoe is a Legal Director in our construction team.

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