Is your contractor heading for financial difficulties? A contract management checklist

The risk of labour and materials cost inflation running significantly ahead of “general” inflation in either a “no-deal” or a “bad-deal” Brexit scenario raises the spectre of further contractor insolvencies.

Despite the collapse of Carillion receding into the memory, some contractors are still going under. Contractors are also pushing back on the terms of parent company guarantees, insurance provisions and indemnities and are increasingly looking for caps on liability.

Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption. This article looks at the situation where you have let (and hopefully signed) your contract. There’s plenty you should be doing at the procurement stage, as well, but that’s for another day.

When managing a contract, you should:

• Ensure that your contract has actually been signed and dated by both parties and if not, prioritise getting this done. Find out why it has not been signed; is the contractor disputing its terms?
• Keep contract management information up to date, including a list of the people working on the contract, a regularly updated assets database with details of all component replacements, current health and safety information and annual insurance policy details;
• Manage and monitor the contract actively, keeping on top of “payment routines” extension of time/compensation event claims and Instructions issued under it;
• Check you know what work your contractor is undertaking and that it is being done and invoiced promptly. Keep track of what you will owe your contractor for each completed task or stage and how much of this has been paid in interim payments;
• Make sure you can access financial and other contract records if your contractor’s IT system goes down on their becoming insolvent;
• When considering contract variations, make it clear to your contractor that the current terms still apply until a formal deed of variation is signed, and ensure that any variation is legally permissible;
• Have your contract independently audited periodically to check that the terms of the contract reflect what is happening "on the ground" and vice versa. Keep the contract documents up to date with any changes you have agreed;
• Maintain contingency plans for contractor insolvency, “stress test” them and keep them up to date;
• Watch out for the "warning signs" of contractor insolvencies such as subcontractors and suppliers complaining about not being paid, frequent changes of staff, recruitment and resourcing difficulties and requests for "payments on account" (or, conversely, late or incomplete payment requests); and
• Take advice promptly as soon as any problems are identified – don't leave it too late to put contingency arrangements in place.

The above points are not exhaustive, and in many cases are just the starting point for your preparations and investigations. Each contract needs to be considered on a case-by-case basis depending on its value, length, subject matter and terms.

The overall message is clear, though. You need to consider the risks and implications of contractor insolvency at the scoping and procurement stages, manage your contracts actively, maintain up-to-date contingency plans and be ready to react quickly if your contractor does get into financial difficulties.

For more information

If you would like advice on any of the issues raised in this article or believe your contractor is heading for insolvency, please contact Andrew Millross.