On Thursday 29th November personal and commercial law specialists Cripps, and barristers specialising in construction and insurance law Hardwicke, held their annual construction seminar which focused on insolvency from the employer’s perspective. With the failure of Carillion still a hot industry topic, many employers are keen to know what went wrong and the measures they can take to prevent, mitigate or manage situations of contractor insolvency.
Around London and other UK cities there are a vast number of ongoing construction projects. However, in today’s economic environment, contractor insolvencies are on the rise. Combined with a decrease in bank lending, a devalued currency, increased supply costs and fears of Brexit related shortages of materials and specialist labour, the market conditions are very tough.
Cripps highlighted the precautionary measures that should be taken by the employer on any construction project, especially in the current economic climate.
Firstly, ahead of appointing a contractor an employer should carry out financial due diligence to establish their financial strength and capability. This could include credit checks using a credit status agency, viewing accounts filed at Companies House and assessing historical records. Although not foolproof, this due diligence can provide a valuable insight into the credit worthiness of a contractor.
One of the most effective precautionary measures is to specify the requirement of a performance bond in the contract. A performance bond will provide the employer with a degree of financial protection if the contractor breaches the contract for any reason, including insolvency. The contractor is obliged to approach their bank or surety market to seek the bond. As surety bond specialists we assist our contractor clients by negotiating with the numerous sureties to obtain a competitive bond in favour of the employer.
Employer, Contractor and Subcontractor Benefits
There are benefits to the employer and the contractor in obtaining a performance bond. To the employer, the risk of financial loss due to non-performance by the contractor is partially mitigated by the typically 10% bond. They obtain the superior financial strength of a regulated and highly rated surety. Finally, the prequalification by the surety endorses the financial strength and ability of the contractor.
For the contractor, obtaining the surety bond shows their professionalism, indicates their financial capability, prevents delays in starting projects and receipt of payments, avoids the risk of losing the job and fulfils a contractual award requirement.
Whilst this article has focused on employers, the same consideration should be given by contractors in relation to their subcontractors. An employer should arguably want to know that their appointed contractor is obtaining bonds from the appointed subcontractors in order to provide an extra level of comfort for the employer.
During such uncertain economic times and with insolvencies set to rise further in 2019 it has never been more important for employers and their contractors to be aware of the precautionary measures they should take to mitigate the risks of contractor and subcontractor insolvency.