Market financial pressures create uncertainties for buyers of construction and engineering services

This story about civils contractor nmcn is just one of a number of current examples of contractors experiencing challenges in the current market.  The recent “perfect storm” of financial pressures impacting on construction and engineering companies, leave employers with difficult decisions to make when selecting a contractor.  The Carillion insolvency demonstrated that no contractor is too big to fail and, if the wrong choice is made, the financial consequences on the employer’s project will be significant as build-outs are rarely simple and low cost exercises to complete. This is a challenge for any employer, but doubly so for public sector bodies seeking to deliver essential infrastructure to meet service user needs, often with limited additional funding available to support cost overruns.   

I will be considering some of the practical steps that can be taken to mitigate exposure to main contractor insolvency when presenting at HM’s housing law update on 27 October.

My approach has always been that prevention is better than cure. In the recent climate, that translates into actively considering ways in which the employer’s financial exposure can be mitigated if the worst should happen. This includes: 

• not extending payment periods under the main contract whenever the employer is in a position to pay within those terms (a previous “lawyer’s favourite” change in schedules of amendments and Z clauses) 
• introducing practical measures under which the main contractor must pay the supply chain promptly and evidence it has done so (in lieu of having project bank account arrangements in place, which remain unpopular in the market)
• ensuring sub-contractor/supplier invoicing is contract and site specific
• restricting the main contractor’s use of set-off rights under sub-contracts (to ensure flow down of funds to support the employer’s project and not those being procured for others)
• introducing “significant sub-contractor” step-in undertaking requirements, to give the employer rights to take over all major sub-contracts following main contractor insolvency (and securing non-payment “whistleblowing” commitments from the sub-contractors) 
• considering the use of payment mandates and other mechanisms under which the employer may make direct payment to the supply chain in relation to significant costs (and in particular in relation to off-site goods and materials); and
• thoroughly reviewing bond arrangements (recognising the limited value of traditional conditional performance bonds in an insolvency situation and the difficulties/expense of securing on demand bonds).    

There will inevitably be reluctance on the part of contractors to change long established practices and for them to be more “open book” in relation to their dealings with the supply chain.  If measures along the above lines are not adopted, however, the employer’s financial exposure in the event of main contractor insolvency will not be mitigated and the risk of having to pay for elements of the works twice when undertaking a build-out will remain in place.  It is sometimes necessary to tackle hard contractual issues head-on in order to take the steps needed to protect our clients against significant commercial risks.