UK: Contractors In Trouble: Spotting The Warning Signs

Last Updated: 28 January 2009
Article by Steve Tancock

As building projects slow down, developers need to be watchful of suppliers running into financial trouble. Steve Tancock suggests what to look out for.

The market for new housing developments has almost come to a standstill, leaving contractors faced with either completing projects with little likelihood of sales or 'mothballing' them until the market recovers.

As a result, a number of major construction companies have imposed more onerous trading terms on their subcontractors. They are also rationalising their list of sub-contractors by insisting upon a test of solvency to gain or retain preferred supplier status. While this is of benefit to those on the list, it is bad news for those who haven't made the cut. However, it may be a double-edged sword for those on the list as the trading terms and conditions they are signing up to may be particularly prohibitive regarding profit and payment terms, and continued turnover is the only benefit that they derive in these difficult times.

For those working within the industry, be they contractor, sub-contractor or subsub- contractor, the essential component for continuing to trade successfully is payment in cash on time to meet debts as they arise.

Look out for cracks

As a developer or a contractor employing multiple sub-contractors for a development, it is important to be able to identify signs which indicate that a sub-contractor may be experiencing difficulties. There are a number of warning signs you should look out for.

  • Contractors/sub-contractors will try to increase their valuations by as much as possible and their applications for payment may be inflated significantly.
  • The availability of labour on site is often a key indicator of a problem with a sub-contractor, as are apparent delays due to the lack of availability of materials or goods. The latter may indicate that the sub-contractor is unable to purchase materials due to poor current payment records with suppliers.
  • 'Word on the street'. Dissatisfied employees or sub-contractors often make their feelings known to other trades on site, thereby signalling the predicament of their employer.

These signs are often accompanied by requests for payment for easily removable materials on and off site, causing potential problems in the event of a failure by the sub-contractor. Retention of title issues also come to the fore and you may discover that you have paid for goods you can no longer find or use.

Payment and cashflow problems are now widespread in the industry. It is important to maintain cash flow with your key subcontractors and suppliers to enable you to meet your contractual obligations to your client.

Provide scaffolding for support

However, if there is a failure of a supplier or sub-contractor, your contractual obligation to your client remains. There is no opportunity under standard building contracts for you to pass the default onto your client. Your client will still expect the project to be completed on time and within budget. Therefore, it may be in your company's best interest to help the potentially defaulting party to continue trading so that your project reaches completion and your company does not incur damages.

Demolish or renovate?

Specialists in turnaround management can, on your behalf, review the operations of a company experiencing problems to establish a suitable strategy for recovery. Based on their assessment of whether the problems are terminal or not, they will either recommend insolvency or suggest changes so that the company can continue trading. These may include changes to management practice and procedures that may result in improved cash flow and more proactive management. These may initially protect the business's short-term future as a prelude to it becoming more successful at the end of the review period.

Therefore, if you believe that any of your suppliers or sub-contractors are experiencing financial difficulties and insolvency is a possibility, address the issue head on, do not sit back and wait. Ensure you maintain cash flow as necessary with your various suppliers, paying within the terms while not unnecessarily exposing your business to cashflow problems from early payments.

In such circumstances, turning a business around to ensure its continued success requires early intervention. It is also best to ask an insolvency practitioner what your position is relative to the potentially insolvent party.

If one of your sub-contractors, or even your company, is experiencing difficulties, ask for a free review by an insolvency practitioner at Smith & Williamson. We can help ascertain whether there is an insolvent trading position or not. For your own business, avoiding insolvent trading is critical because of the personal liability that arises for the directors of the company or you as an individual.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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