Insight
A number of my recent perspectives have focused on managing contractor insolvency risk in construction and engineering projects. This article relating to Create Construction unfortunately confirms this is a very real risk for purchasers of construction and engineering services. Where insolvency occurs in relation to with jobs “already on the park” it will be a case of sorting out the mess as best the employer can. I recommend paying particular attention to any performance bonds issued in support of the contractor’s obligations and whether these will pay out to compensate the employer for the additional build-out costs that will inevitably be incurred as a result. Taking early legal advice on this key issue is highly advisable!
For projects still in procurement, we advise a simple 3-step process to manage/mitigate the risk:
- Pay the main contractor promptly and resist temptation to extend standard for payment periods (typically 21 days) during contract negotiation.
- Insist on contract clauses that will ensure sums paid to the main contractor flow down to the supply chain quickly. Actively manage flow down through operation of the main contract payment mechanism and by obtaining obtaining non-payment “whistleblowing” commitments from significant subcontractors included in step-in undertakings that allow the employer to take over those subcontracts following an insolvency event.
- Finally, make sure you get a performance bond from the main contractor that pays out based on an adjudicator’s decision/without having to go through lengthy and expensive court proceedings, expressly covers additional build-out costs following an insolvency event and has a long enough expiry date.
It is impossible to exclude the risk of a main contractor insolvency event occurring during a build, but good contract negotiation and prudent contract management can significantly reduce the adverse financial consequences for the employer where this does arise.