Contractor insolvency – the risks and the warning signs

The collapse of Carillion in January this year was a timely reminder that, while the economy as a whole slowly improves, the construction and maintenance industry still faces significant insolvency risks.

These risks, if they materialise, ultimately impact on the delivery of development projects and facilities management contracts alike and can result in delays to completion and employers incurring substantial additional costs.

The warnings from former shareholders of Interserve on 13 November 2018, further emphasise that organisations who have engaged contractors need to remain vigilant for the warning signs of contractor insolvency, and have a clear strategy to deal with insolvency events before they materialise.

Warning signs

While it is important not to jump to conclusions about the financial health of your contractors, there are a number of common warning signs which can indicate that a contractor is at risk of insolvency, including:

• Aggressive invoicing – either through invoicing early, inflating the value of invoices, or issuing multiple invoices;
• High rate of staff turnover, particularly in key “delivery” roles;
• Deterioration in service performance;
• Sub-contractors approaching you for payment directly; and
• Lack of communication, or a delay in the contractor responding to questions.

Resident complaints can also be a very effective barometer as to the performance, and health, of a contractor. A sudden spike in the number of complaints may well indicate that the contractor is experiencing difficulties.

Preparation

So, what should social housing providers do when they identify the warning signs?

First, check the terms of your building contract regarding insolvency, termination and payment. The suspicion of insolvency will not normally entitle you to terminate a contractor or cease paying a contractor, but many building contracts will allow for payment to be withheld if the contractor becomes insolvent after the deadline for issuing a Pay Less Notice. This will depend on the precise wording of the contract in question, as will the process for terminating the contractor’s employment, and engaging an alternative contractor to deliver the remainder of the works. Being clear as to your contractual rights is therefore key to successfully responding to insolvency risk.

Secondly, ensure you know what protections you have in place – do you have a performance bond or parent company guarantee? Understanding how these operate means you are one step ahead if the worst should occur. There are different types of bonds and guarantees, protecting a variety of risks, so being clear about what action to take in which order is key to protecting your position.

As a third step, make sure you understand your procurement processes and standing orders for engaging new contractors on an emergency basis, particularly for services like gas servicing or responsive repairs, where it is not feasible to have a large period of “down time” while you procure a replacement.

Finally, if you are concerned that a contractor may be at risk of insolvency, seek early legal advice as to your options, both for determining the contractor’s employment, calling on a bond or guarantee and procuring a replacement contractor to finish delivery of the project.

Further information

We are experienced in advising social housing providers on how best to respond to contractor and supplier insolvency. If you are concerned that a contractor or supplier is at risk of insolvency, please contact Kieran Binnie or Beulah Allaway.