Protecting companies against the liquidation of a main contractor
Posted on 17th November 2021 at 13:01
While many areas of the economy get back on their feet post pandemic, the full extent of the financial impact on the construction industry is yet to be seen.
One recurring, major issue for subcontractors is when a main contractor goes into liquidation. Without the right protection in place, this can be catastrophic for subcontractors who could be owed thousands of pounds.
At SubPort we provide Quantity Surveyors, to subcontractors in the construction industry. We also provide Quantity Surveyor advice, finance support and guidance. Unfortunately, in our line of work the scenario of subcontractors being out of pocket due to a liquidated main contractor is far too regular an occurrence.
Recent examples are the collapse of NMCN with pre-tax losses of around £43 million and Create Construction of Blackpool. Subcontractors involved with these companies will obviously be affected financially by their liquidation.
What steps can subcontractors take to protect themselves against main contractor liquidation?
Research the client before entering into a contract
Conducting thorough research into the client (main contractor) is essential. The subcontractor needs to know that the main contractor doesn’t have a history of leaving subcontractors high and dry. There are basic elements that can be investigated:
Obtain the company’s credit score through one of the business credit reporting agencies. Three major players are Dun & Bradstreet, Equifax Business and Experian Business.
Check for County Court Judgements (CCJs). If a potential client has been ordered to repay debts by a court, that raises a red flag. If a CCJ debt is not paid within a month it stays on a company’s record for six years. Again, a credit agency can help investigate this.
Review the company’s most recent year end accounts. Some common red flags are increasing debt-to-equity (D/E) ratios, consistently decreasing revenues, and fluctuating cash flows. These issues can be found in the data and in the notes of a financial report. A company’s year-end accounts can be obtained from Companies House.
Check for any deferred year end accounts, sometimes companies defer and submit their accounts late as they know it will affect their credit score
Repeated late payments are a sign of cash flow problems – whatever the excuse is given
Redundancies and removal of staff without explanation
Removal of materials, plant, and equipment from site
Repeated delays to programme without due explanation
Take out debt insurance cover
Even if the main contractor has insurance against the project, it won’t cover all of the subcontractor’s risk. Some insurance companies offer specific subcontractor insurance.
How to avoid becoming a financial victim of a main contractor liquidation
There are many ways subcontractors can avoid being in the position of losing money when a main contractor folds. The key element here is to administer the contract correctly and diligently, keeping it up to date. This way, subcontractors can avoid being owed a backlog of money from the main contractor.
SubPort help subcontractors to keep on top of client contracts and to negotiate the best terms for their involvement in the project. With SubPort’s help, subcontractors can:
Making sure Contract terms are negotiated to include protection, such as minimising payment terms
Structure the tender in such a way as to maximise cashflow
Submitting comprehensive, well-structured payment applications on time every time
If the approved baseline of a project changes, administer change control on time. This includes fully substantiating changes and following up with the agreement of the changes made
Chase cash and overdue applications.
Ensuring if retention has to be held it’s applied for and released in line with the Contract terms
Ensuring that the title of goods only passes to the contractor on payment and ensuring suspension and termination clauses are included for non-payment
Seeking payment for materials off site using vesting certification
Get in touch
If you are a subcontractor in need of professional advice regarding the financial repercussions of a main contractor going into liquidation, please get in touch with the team at SubPort by calling us on 0333 200 7205 or using our contact form.
We can also support subcontractors with estimating and tendering, valuations and cost management, valuations of variations, contract reviews and dispute resolution.
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