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Forecasting hard times for sub contractors

12 October 2010 #Construction


The severity of the government cuts likely to be announced this month will inevitably lead to a substantial reduction in capital spending projects in the public sector. Coupled with uncertainties in the residential and commercial property sectors means that many main contractors are facing tough times and many could go out of business altogether.

The construction industry relies heavily on sub contractors. Most sub contractors are small owner managed businesses and for many these uncertain times means that times will also be getting tough as the knock on effect will severely damage their own businesses and threaten their livelihood. Those that survive will be those that have a handle on where they are, where they are going and are able to react to changing circumstances.

When a main contractor goes bust the suppliers and sub contractors are often left with substantial unpaid applications and a bad debt will often cause many sub contractors involved with much larger main contractors to also become insolvent.

If a sub contract business is going to survive it is essential that early action is taken to minimise the impact of a main contractor`s insolvency. Mike Grieshaber states that there are key points to be considered:

  • Recognise the warning signs and minimise the exposure to bad debts
  • Have a robust and clear business plan
  • Manage the risks
  • Manage the cashflow, after all cash is king in tough times
  • Control the finances and business costs
  • Monitor progress and make changes if necessary
  • Have early communication with creditors to manage their expectations and payment plans.

Early intervention will preserve and enhance profits, save jobs and livelihoods and give a business an advantage over its competitors.

In the event that a sub contractor cannot survive such a bad debt then there are formal insolvency procedures and turnaround options available that could enable a business to survive.

What legal rights do sub contractors typically have when faced with the insolvency of a main contractor? 

This will depend in part upon whether the Employer, desperate to get works completed and to save time or money, decides to enter into direct agreement with sub-contractors to complete outstanding works, and which the Employer will then pay for direct to the Sub-Contractor. This could be through exercise of step-in rights under collateral warranties that sub-contractors with design responsibility are typically asked to provide, or by new agreement direct between the Employer and Sub Contractor.

Alternatively, and usually when there is relatively minor amount of outstanding works, an Employers might agree with the Insolvency Practitioner to allow the insolvent contractor (and therefore the appointed sub-contractors) to finish those works, with payment being made in full.

Employers may have the right, under their contract with the Main Contractor, to make payment direct to Sub Contractors of outstanding monies due where the Main Contractor is insolvent.  Most Employers will not however do this, as Sub Contractors must be treated equally with all other unsecured creditors. Payments direct would put Sub Contractors in a privileged position compared to other unsecured creditors, whilst Employers will remain liable to make payments of those monies to the liquidator/administrator of the Main Contractor, meaning they could end up making the same payment twice.

In any event, carefully check the wording of the sub-Contract to see what can be done and when following insolvency of the Main Contractor, to include:

  • Right of termination of the sub-contract or suspension of works
  • Insurance issues
  • Payments procedures
  • Right to recover from site plant and materials delivered but not paid for or affixed to land.  Are there any retention of title clauses in the terms and conditions that affect this right?

Authors note

David Rintoul is head of construction law at Clarkslegal LLP, top-ranked specialist legal advisors to the construction industry, providing user-friendly, up to date and to the point advice to all sectors of the industry.  David is on the advisory boards of several industry bodies, including the Confederation of Construction Specialists, and who promote the interests of specialist sub-contractors.

Mike Grieshaber is a Licensed Insolvency Practitioner and business advisor with over 25 year experience is assisting small and medium sized owner managed businesses. In 2009 he founded MLG Associates which is able to provide a comprehensive and independent business review service for businesses which could give them the edge in a competitive world.

Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at constructionsector@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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David Rintoul

David Rintoul
Partner

E: drintoul@clarkslegal.com
T: 0118 960 4675
M: 07880 741 514

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