Tackling contractor insolvency in the construction sector
Insolvency rates in the construction sector are among the highest, meaning firms need to take steps to protect themselves from contractor insolvency.
Figures from insolvency and restructuring trade body R3 reveal that 47% of construction firms took a financial hit as a result of another firm’s insolvency in the first half of 2018.
That is in addition to a quarter‐on‐quarter trend which shows contraction across the sector, as stagnating house price growth slows output among house builders, coupled with reduced spending on infrastructure.
Due diligence becomes key for construction firms as measures need to be taken to gain a full and complete understanding of a supplier’s finances.
Credit checks and company references can provide a degree of information, while it’s also important to check a contractor’s payment processes.
If payments to subcontractors or suppliers are being delayed, for example, it could be disguising wider financial issues.
Using a higher percentage of retention could also be used as an incentive to ensure that construction works are completed on time and on specification.
The contractual practice provides a degree of security should work not be done to standard, as a proportion of the payment can held back if required.
Further protection can come in the form of warranties that are procured from the contractors involved in the projects.
Those involved may also benefit from step‐in rights in an instance of contractor insolvency, providing the project lead with the ability to appoint or sub‐contract as required.
The key for firms is to manage contracts effectively in order to mitigate the risks that could be attached.
This should mean that a degree of financial protection exists should a contractor enter insolvency or an alternative financial issue appear.
If short‐term cash flow issues result, there are a range of alternative finance options with various costs and structures that may be applicable.
A company may also wish to consider an independent business review to highlight specific areas of risk relating to their finances, forecasts or assets.
By Phil Smith