From understanding your legal rights to reviewing your contracts and documentation, read on to explore how to navigate the challenges of working with an insolvent contractor and get your project back on track.
What is Contractor Insolvency?
With a large number of British businesses facing considerable financial hardship, almost every industry is feeling the pinch, and construction businesses contribute significantly to the number of distressed companies. As well as the sky-high interest rates and inflation that are impacting numerous industries, there are several industry specific factors, such as delays in currency exchange, insolvency chain reactions, and intense competition between construction firms for projects.
An insolvent contractor is one who is unable to pay their debts and may have filed for bankruptcy or entered into a formal insolvency arrangement. Once an insolvent contractor has entered into a state of insolvency, their business will be wound down and they will no longer be able to complete the work you contracted them to do.
Once the project has begun, there are several warning signs of a contractors financial instability to be aware of, including:
-
Industry rumours regarding the financial wellbeing of the contractor.
-
Key employees leaving abruptly, including people from the contractors core project team
-
Slow progress and frequent project errors.
-
Sub-contractors are either not being paid or not being paid on time; some of them may even approach the employer for compensation.
-
The contractor is attempting to bill you or other employers for more than is reasonable.
-
The contractor is late in filing its annual returns.
Whilst none of these factors immediately mean that the contractor is in financial trouble, they are worth being aware of as a combination of these signs likely signal contractor insolvency.
Protecting Your Business
Prior to signing the contract, it is recommended that your business does background research (including a credit report) on the contractor's financial state, which can give you early insight into any signs of bankruptcy. Evaluate the contractors’ current financial state, ensure that they are adequately insured, and review the termination options within the contract. You should also take the following precautionary steps to minimise the impact on your business if you contractor becomes insolvent:
-
Obtain an insurance policy to pay for any defective work should the contractor become insolvent.
-
Refrain from advance payments, or from paying the contractor in full until the job is complete.
-
Acquire security, such as a guarantee from the parent company (if applicable), or a performance bond.
-
Ensure that any and all communications between the contractor and your business are in writing.
-
Securing sub-contractor warranties in your favour if the contractor is unable to finish.
-
If advance payments must be made, obtain an on-demand advance payment bond for security.
-
Conduct regular reviews of the project to ensure that the work is progressing on schedule and within budget.
By taking these steps, your business will be safeguarded in the event of the contractor becoming insolvent.
Navigating an Insolvent Contractor
In the event of contractor insolvency, your business must take action such as securing the site, informing financiers, and assessing your legal rights. Once a company has become insolvent, their work is to be stopped immediately, regardless of any notice. Your company has the right to end the contract in accordance with the contractual requirements, and you may not be obligated to pay the contractor any money owed since the last payment.
However, these terms may differ depending on the specific terms of the contract. For example, terminating too soon or not allowing the contractor onto the site even if they are not officially insolvent could be seen as a breach. It is also possible for your business to have grounds for termination before the contractor is contractually insolvent, if the contractor does not continue with their duties. As is the case with all legal disputes, it is highly recommended that you consult financial advisors before terminating to reduce the chance of any breach of contract.
Once the contractor has become insolvent, it is time to think about how the project will be completed. Depending on the kind of work remaining to be done, this may require running a public tender and contracting a new business to wrap up the project. When a project involves subcontractors, you may have the right to take over the contractor's role and manage the subcontracts or transfer them to the new contractor depending on the terms of the subcontract documents.
You should be cautious of agreeing to make payments directly to subcontractors unless you are contractually obligated to after exercising your step-in rights. It is advisable to seek legal advice before making any direct payments, as well as discussing the resolution to any insurance issues with a legal professional, as this is likely to become your responsibility.
Business Insolvency Solutions
By doing your due diligence from the get-go, and keeping an eye out for signs of insolvency during a project, you can avoid the impact of contractor insolvency on your business. If you are worried about your contractor’s financial situation, or you are keen to seek legal advice regarding your contracts, then we are here to help.
At BEACON, we are committed to finding a positive resolution for your business and helping you navigate the complexities of contractor insolvency. To learn more about our services, or to discuss your requirements with a free, no-obligation consultation, please contact our team today.