Insolvency Advice to Construction Industry Sub-Contractors - Be Prepared
The uncertainty of what will happen in the residential and commercial property sectors and the severe government cuts due to be announced shortly will certainly lead to a reduction in capital spending on public sector projects. The result will be that many main contractors will be facing hard times that could even render some insolvent.
The effects will very likely be felt by the most vulnerable stakeholder, the sub-contractor, which could see its business threatened and its livelihood at stake. The construction industry relies to a great extent on sub-contractors, which are mostly small and owner-managed. For many, these difficult times will just get tougher. For the sub-contractor to get through this, it will need to be in control of where it is now, where it is heading and be in a position to adapt to the changing climate.
Suppliers and sub-contractors are often left out-of-pocket and with bad debt, and this alone can be instrumental in causing many of them, especially those involved with the larger main contractors, to become insolvent too.
For the sub-contractor to survive it must be prepared: it is paramount that early action is taken to reduce the impact that a main contractor's insolvency can have. Mike Grieshaber, Licensed Insolvency Practitioner and business advisor, offers some sound advice:
* Learn to recognise the danger signs and be on the look out for them early one; this can minimise exposure to bad debts
* Know your business plan
* Understand the risks and manage them
* Be in control of cashflow, this will prove to be a saving grace
* Tightly manage finances and costs
* Keep track of progress and adapt as demand dictates
* Keep communications ongoing with creditors early on, this manages their expectations and payment plans.
Timeliness is everything; if the sub-contractor can intervene early on, there is more chance profits can be preserved and jobs can be saved. It is the one thing that can gain business advantage over the competition.
Should the worst happen and a sub-contractor does not manage to overcome a bad debt scenario, formal insolvency procedures and turnaround options are available that could enable a business to survive.
The sub-contractor does have some legal rights when faced with the insolvency of a main contractor. These depend in part upon whether the employer, wishing either to complete a project or save time and money, decides to enter into an agreement directly with sub-contractors to complete outstanding works. The employer would then pay for this work directly to the sub-contractor. This can apply through the use of "step-in rights" under collateral warranties which sub-contractors with design responsibility are usually asked to provide, or by new arrangements set up through employer and sub-contractor agreement.
Another option, usually when a relatively small amount of incomplete work remains, is for the employer to agree with the Insolvency Practitioner to allow the insolvent main contractor (and by default the sub-contractors) to finish the works and have payment made in full.
Under the contract with the main contractor, employers may be able to make payment of outstanding sums directly to sub-contractors. It is worth noting, however, that most employers will not do this because sub-contractors should be treated in the same way as all other unsecured creditors and to pay them directly would put them in a privileged position. However, employers are still liable to make payments of outstanding balances to the liquidator or administrator of the main contractor, which means they could be paying double the amount.
Most importantly, it is prudent to check very carefully the wording of the sub-contract to understand what the options are. Look specifically for:
* The right to terminate the sub-contract or suspend works
* Insurance liabilities
* The agreed payment process
* The right to recover plant and materials which are on-site
but not paid for or affixed to site.
Check for 'retention of title' clauses in the terms and conditions that affect this right.
The effects will very likely be felt by the most vulnerable stakeholder, the sub-contractor, which could see its business threatened and its livelihood at stake. The construction industry relies to a great extent on sub-contractors, which are mostly small and owner-managed. For many, these difficult times will just get tougher. For the sub-contractor to get through this, it will need to be in control of where it is now, where it is heading and be in a position to adapt to the changing climate.
Suppliers and sub-contractors are often left out-of-pocket and with bad debt, and this alone can be instrumental in causing many of them, especially those involved with the larger main contractors, to become insolvent too.
For the sub-contractor to survive it must be prepared: it is paramount that early action is taken to reduce the impact that a main contractor's insolvency can have. Mike Grieshaber, Licensed Insolvency Practitioner and business advisor, offers some sound advice:
* Learn to recognise the danger signs and be on the look out for them early one; this can minimise exposure to bad debts
* Know your business plan
* Understand the risks and manage them
* Be in control of cashflow, this will prove to be a saving grace
* Tightly manage finances and costs
* Keep track of progress and adapt as demand dictates
* Keep communications ongoing with creditors early on, this manages their expectations and payment plans.
Timeliness is everything; if the sub-contractor can intervene early on, there is more chance profits can be preserved and jobs can be saved. It is the one thing that can gain business advantage over the competition.
Should the worst happen and a sub-contractor does not manage to overcome a bad debt scenario, formal insolvency procedures and turnaround options are available that could enable a business to survive.
The sub-contractor does have some legal rights when faced with the insolvency of a main contractor. These depend in part upon whether the employer, wishing either to complete a project or save time and money, decides to enter into an agreement directly with sub-contractors to complete outstanding works. The employer would then pay for this work directly to the sub-contractor. This can apply through the use of "step-in rights" under collateral warranties which sub-contractors with design responsibility are usually asked to provide, or by new arrangements set up through employer and sub-contractor agreement.
Another option, usually when a relatively small amount of incomplete work remains, is for the employer to agree with the Insolvency Practitioner to allow the insolvent main contractor (and by default the sub-contractors) to finish the works and have payment made in full.
Under the contract with the main contractor, employers may be able to make payment of outstanding sums directly to sub-contractors. It is worth noting, however, that most employers will not do this because sub-contractors should be treated in the same way as all other unsecured creditors and to pay them directly would put them in a privileged position. However, employers are still liable to make payments of outstanding balances to the liquidator or administrator of the main contractor, which means they could be paying double the amount.
Most importantly, it is prudent to check very carefully the wording of the sub-contract to understand what the options are. Look specifically for:
* The right to terminate the sub-contract or suspend works
* Insurance liabilities
* The agreed payment process
* The right to recover plant and materials which are on-site
but not paid for or affixed to site.
Check for 'retention of title' clauses in the terms and conditions that affect this right.
