Partner Article

Construction companies need to take precautions

As the Construction Industry reports increased numbers of ’profit warnings’, a regional specialist in Construction Law recommends that firms take a number of precautions to protect their businesses.

The highest number of construction industry profit warnings since the credit crisis began were recorded in the second quarter of 2012, while most other FTSE sectors saw a year-on-year drop in profit warnings*. Phil Morrison, specialist in Construction Law with Samuel Phillips Law Firm, said: “Right now, it’s vital that construction companies take precautions to ensure that the failure of a client or subcontractor doesn’t destroy their own business at the same time.”

Mr Morrison recommended a number of actions that businesses could take to minimise the risks. Initially they should analyse their accounts for the last three years so they can identify any relevant trends. They should also credit check clients to ensure they can pay, as well as subcontractors and suppliers to ensure they will deliver as contracted.

As well as keeping on top of their outgoing payments, firms should monitor the payment schedule in each contract. Mr Morrison commented: “Longer periods between payment dates are a worrying sign. Smaller amounts, paid more often are preferable. The longer between payments, the larger the payment, and therefore the greater the potential loss.”

He offers several pieces of advice to employers to ensure that contractors do not put a project at risk. These include asking contractors to put in place a performance bond, recommended at 10% of the value of the contract. Should the contractor default, the employer can call on this bond to progress the project while a replacement contractor is found. Alternatively, if appropriate, the contractor’s parent company can provide a guarantee.

Furthermore, Mr Morrison recommends that employers act immediately to terminate the contract in the event of an insolvency event, that is if the contractor goes into liquidation, into administration, or is seeking to rearrange debts with its creditors. He says: “Do not assume that the contract will automatically come to an end, but take action to terminate it immediately.”

Contractors need also to minimise the risks at this time as an employer going into insolvency could mean the contractor is not paid. One solution is for the contractor to request the employer creates a ‘project bank account’ where the money remains in trust, ring-fenced for the specific project. It is also acceptable for contractors to ‘front-load’ their invoices, with larger amounts billed in the earlier part of the contract to cover cost such as materials, wages and other preliminaries. Contractors could also request direct payment from the funder, rather than the firm above them in the supply chain.

Mr Morrison concluded: “A number of factors have put the industry under pressure. With far less PFI work available and larger firms looking elsewhere for business, the smaller construction companies could be most vulnerable. However, there are a number of elements which can be incorporated into contracts which will help protect firms should others in the supply chain fail.”

Robert Gibson, senior partner with Samuel Phillips Law Firm, added: “It is now more important than ever that construction firms seek specialist advice for their businesses. Where the insolvency of an employer or a sub-contractor could seriously jeopardise your own business, it is vital that contracts are in place to provide protection.”

This was posted in Bdaily's Members' News section by Samuel Phillips Law Firm .