The headwinds facing the construction industry have gathered speed in recent years due to a confluence of major events, including Brexit, Covid-19 and the impact of the war in Ukraine. This has led to labour shortages, increased raw material costs and, at times, severe supply chain delays and dislocation. In addition, the sector is tackling ESG issues and trying to find innovative ways of utilising technology to increase efficiency and profitability. The collective impact of these issues on the industry is difficult to overstate, particularly where fixed price contracts and thin margins are common - an increase in insolvencies in the sector seems likely. At times like these, the effective management of supply chains is more critical than ever.
Companies need to consider how to best protect themselves if there is an issue and how to do so quickly. Often the first 24-48 hours in an insolvency scenario are critical, especially with issues such as recovering any goods subject to retention of title.
There are lots of good practices that can be implemented within a business to improve the chances of a satisfactory conclusion being reached should there be a problem. It is critical to be prepared and to remain vigilant about the financial state of your suppliers and other key counterparties. Whilst businesses often have a clear credit check protocol for taking on new suppliers or customers, ongoing monitoring is often less diligent. There is often indication of financial distress before any insolvency process is commenced. There are the more obvious signs such as announcements to the market or creditors issuing winding up petitions, but there are a plethora of things which alone may mean nothing, but which sometimes - often when coupled with other issues - signal underlying distress. Examples are sudden or repeated changes in management; late payment or non-payment of supply chain invoices; attempts to renegotiate payment or contract terms including requesting lengthy delays in payments and attempting to withhold retention monies; delays or suspension of works; decline in the quality of work being undertaken on site or reduction in the size of the workforce attending site; late filing of accounts or qualifications to accounts; Court judgments; rumours. Where possible, consideration should also be given to a counterparty's wider group, as failure in one part of the group could pull the rest down where for example cross-guarantees have been given by all group companies to a lender.
In addition to monitoring counterparties, there are many other ways that these risks can be mitigated:
- Strong drafting in contracts - robust retention of title ("ROT") provisions; considered termination language, taking into account the changes in law noted above around the ability to terminate because of insolvency; suspension clauses including a clause permitting suspension of performance in the event of the other party's insolvency; and collateral warranties which create a direct contractual relationship between contractors, consultants or subcontractors and the employer.
- Auditing contracts - however diligently contracts have been negotiated and drafted, people in the business need to know what their rights are under these contracts and what they should do if something happens. It is also important to have clear internal protocols for dealing with such issues in place to avoid delays.
- Supply of goods - if you are a supplier and your ROT clause allows you to inspect the customer's site to ensure goods are being stored as they should, take advantage of that right. Whichever side of a contract you sit, if you don't have an umbrella / master agreement containing the ROT terms, ensure that the provisions which you think are incorporated in the contract remain so by always including them on your order, acceptance, delivery and invoice documentation.
- A clear credit control protocol and effective implementation of the same.
- Diversifying supply chain and contingency planning - following the Covid-19 pandemic and the war in Ukraine, many businesses and considering 'near-shoring' where possible to reduce the risk of delays and blockages in a global supply chain due to macro factors. Whether suppliers are local or overseas, it is important that there are options available, should something go wrong with a key supplier or customer.
- Early and prompt notification of claims - it is always prudent to notify potential claims against third parties early, but this is particularly important if there are concerns regarding the solvency of the culpable party. Notification prior to the insolvency event will increase the chances of the claim being covered by any applicable insurance and potentially provide rights to pursue claims directly against Insurers under the Third Parties (Rights against Insurers) Act 2010.
These risk mitigation tips are not a panacea, but businesses with well managed supply chains will increase their chances of weathering any storm. For companies facing distress, early consultation and consideration of restructuring options are vital to try to find a way through what look to be inevitable further difficulties for the industry on the horizon.
Originally published in Premier Construction
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