Commercial director Peter Smith confirmed on Wednesday that £50m-turnover Churchfield would be applying for an administration order.
The move shocked rivals in the fit-out market, which is seen by many in construction as having huge growth potential.
Smith said: "We are applying to the courts right now. The process is ongoing at the moment. There is nothing more we can say until we have a set timetable." One rival reacted with dismay to the news. He said: "It's a ghastly situation; really terrible." A Churchfield source said the firm had been hit by an unpaid bill of £1.5m on single contract in London.
Rivals also pointed to the recent explosion in fit-out work, which has stampeded contractors into the market. One rival said: "There's so many people doing it now, it's got a lot tighter. Margins are just not there any more." Another rival said the firm's attack on the call centre and "internet hotel" markets had left it overstretched.
He said: "It moved away from traditional work to having the cream of the cake – but solid businesses are based on such traditional jobs." One fit-out contractor said the speedy growth of the firm played a part in subsequent problems. He said: "It rocketed in size and was diversifying into new businesses but nobody was controlling it." Rivals said many of Churchfield's 132 staff were already looking for jobs. "We are getting a lot of enquiries," one said.
The news follows a mixed year for the firm. It started with the arrival of former Laing director Martin Tidd as group managing director in January. He said that he planned to increase the group's annual turnover by 20% for the next five years and also announced plans to attack the new-build market.
Tidd left 10 months later, following in the footsteps of fellow former Laing director Brian Richardson, a director and non-executive chairman of Churchfield, who left in the summer.
Tidd's departure came as Churchfield decided to postpone plans to enter the new-build market in London.
Tidd, who was director of Laing Construction's southern arm, is thought to have wanted to return to the new-build sector.
Churchfield was also in talks late last year with construction manager Mace to form an alliance to build a series of internet hotels for developer Marylebone Warwick Balfour across Europe.
The talks with MWB, which plans to set up a £500m network of telehotels, subsequently broke down. It is understood that the developer decided to seek a traditional contractor for the work.