Evaluating a Year in Construction - Contractor Insolvency

The construction industry has seen considerable turmoil this year, with circa 40 construction companies going into administration, including some big players like Buckingham Group, Jarvis Contracting and Mulberry Homes, to name a few.

With any difficult situation, it also brings opportunity, and in this case, for solvent contractors it reduces future competition in the market and provides scope to increase their market share by purchasing such companies.

However, there is still a risk that a contractor may go insolvent, leaving construction contracts in limbo and in a poor commercial situation.

We have been reviewing several practical steps that we could take to help reduce the risk to the employer, and have outlined these below:

Prior to Tendering / Negotiating with Contractors

  • Carry out credit checks on proposed contractors
  • Consider procuring a latent defects insurance policy to cover the costs of defective work that may be left behind by the insolvent contractor
  • Procure a parent company guarantee and /or performance bond
  • If a performance bond is not available consider increasing the retention on the project; the contractor should be made of this as early as possible
  • Avoid any advanced payments and appoint an independent RICS accredited surveyor to assess the works completed
  • Ensure that subcontractor warranties have step-in rights to give the employer the option to employ the subcontractor directly post insolvency of the main contractor
  • Procure the insurance for the contract works

During the Project

  • Regular credit checks to understand the contractor’s current position
  • Request management accounts for the previous 6-9 months
  • Procure works to immediately secure and protect the site in the event of insolvency
  • Check that the contractor’s insurance policies remain in place
  • Carry out regular progress checks on site to identify labour shortages and works not progressing or stopped
  • Understand the terms of the building contract and any options available for termination
  • Ensure payments are closely monitored and ensure that the appropriate payment notices and pay less notices are issued at the right time to avoid overpayment
  • Ensure third-party inspections on key packages are employed directly and not through the contractor

We cannot always predict the likelihood of risks during a project; however, we can try to take reasonable steps to reduce the impact.

For more information, get in touch with our team via the details below:

01604 859859


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Posted by: Olivia Smith

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