Wise Up Wednesday: Insolvency – The Coronavirus Of Construction
Insolvency is the Coronavirus of Construction.
I don’t say that lightly, and I have no wish to make light of the deadly Coronavirus. I simply want to make the point that insolvency is having a devastating impact on the construction industry, particularly for Specialist Contractors, Trade Contractors and Subcontractors.
The whole industry is working on tight margins and relying on short term cash flow to fund projects, and subcontractors are bearing the brunt when Contractors go to the wall. This is having a devastating and sadly, in certain cases, fatal consequences for the people involved.
Don’t approach This With Your Eyes Wide Shut!
No one is immune to the Coronavirus and no company is immune to what’s going on in construction right now. Don’t believe me? Think Carillion, Interserve, Clugston, Simons, Shaylor, Stone Edge etc. the list just goes on and on.
So how can you protect your firm from main contractor insolvency?
You must take action. As you might have guessed just crossing your fingers and hoping for the best isn’t going to cut it. But, what can you actually do?
1 Check out who you are working for
Sounds almost too simple, but you would be surprised how many subcontractors don’t take this basic step.
So, here are a few things to bear in mind;
- Don’t rely solely on the size of the company – not all large companies pay their debts on time
- Some National Contractors are the worst payers of all
- Unless you know them well you won’t know whether or not they pay on time or are quick to make deductions or raise set off
- Don’t assume that all offices of a particular National Contractor operate in the same way
- Relationships with individuals within an organisation are crucial but don’t rely solely on these
- Watch out for organisations that have an inherently adversarial culture.
As a very minimum, credit checks should be made on the organisation you are planning to work for. If you don’t subscribe to a credit reference service, give us a call and we will show you the best one!
2 Walk Away
Don’t be afraid to walk away!
If all you can think about is your turnover and keeping your team busy, then think again. If the Contractor becomes insolvent and doesn’t pay you then your problems will be 100 times worse than not having enough work.
Don’t be bullied and don’t get confused. If you’re not sure call our friendly team on our Hotline number on 01773 712116.
3 Check The Payment Terms
Again, this might sound like an obvious thing to check but you might be surprised how many times this becomes a problem.
Make sure that you understand what the contract says. Make sure you know how long the payment period actually is. These days contracts normally refer to a “Due Date” and a “Final Date for Payment”.
3 Avoid the Coronavirus Of Construction – Get Extra Contractual Protection
There are various provisions that can be incorporated into subcontracts and don’t dismiss out of hand the possibility of negotiating terms that protect your interests. The following should always be considered, particularly if there are concerns about the financial position of the main contractor or employer:
Direct payments by employers
If large quantities of materials or unusual or bespoke items are being purchased, you could consider asking for payment up front or selling them directly to the employer.
Project bank accounts
These can be set up so that an employer can pay a subcontractor directly based on sums in the main contractor’s application for payment.
Retention of title
Care should always be taken to ensure such clauses are properly drafted. They can in any event be problematic and easily negated, for example, if the materials have been fixed to a building or have become mixed up with other materials and can no longer be identified, the clause will often be ineffective.
Your right to suspend work or terminate
Most, but by no means all, contracts allow sub-contractors to suspend work for non-payment or on a main contractor becoming insolvent. And you can suspend the performance of some, or all of your obligations for late payment if the Housing Grants, Construction and Regeneration Act 1996 applies.
However, care should always be taken not to wrongfully terminate or suspend a contract and if you’re not sure, call our friendly team on our Hotline number on 01773 712116.
Pay when paid clauses
Watch out for clauses that allow the main contractor not to pay you if whoever is paying them becomes insolvent. These clauses still valid whereas straight pay when paid is not.
You should consider incorporating ‘insolvent payer – pay when paid’ clauses into your own sub-contracts so that, in the event of a main contractor becoming insolvent, you are not obliged to pay your own sub-contractors if the main contractor or employer is insolvent and doesn’t pay you.
How to spot insolvency at an early stage
The short answer is it’s very difficult, but there are warning signs to look for.
This shouldn’t stop you being aware and alive to the possibility, and you should always watch out for signs of main contractor insolvency so that you can take early steps to exercise any relevant contractual rights and/or any other steps to minimise your losses.
Such signs can include adverse reports on their accounts (check regularly), being paid late or in part, unexplained delays to works, materials and plant being removed from site without explanation and even rumours about the main contractor’s financial position.
Avoid the industry Coronavirus – You don’t have to do this alone
You are not immune to the Coronavirus but you can take action to manage risk. If you are in any doubt about how to identify and manage insolvency risks, or don’t know what to do for the best,then please come and talk to us. StreetwiseSubbie’s Nationwide Network of Consultants are experts in helping you to deal with such matters.
If you need help, you can call us or email us and there is no charge for initial advice. You can email using this link or call our Hotline Number 01773 712116.