Construction has been blighted by insolvency of late. In the year to August 2023, the number of construction firms entering insolvency reached 4,263, the highest number of any sector in England and Wales, according to the Insolvency Service.
These figures are not only deeply unsettling for developers but are also undermining investor confidence in large-scale development or deep retrofit projects. Yet there are steps that can be taken to limit the impact of insolvency on a project and give confidence to investors.
Establishing a robust position at the outset will help defend against supplier insolvency. A balance should be made available to ensure swift payments to support the main contractor’s cashflow to their own supply chains. Equally valuable is the introduction of collateral warranties, which ensure a contractual link between any third party and the contractor, sitting alongside the underlying contract and granting meaningful rights to a third party.
Further protective mechanisms, such as the introduction of performance bonds typically at 10% of the contract value, including Association of British Insurers standard terms or on-demand arrangements, can also instil confidence.
Staying alert to signs of distress can mitigate losses sooner. Warning signs include: subcontractors reducing labour and material levels to meet minimum obligations; payments not being made to subcontractors within the contractor’s own supply chain; sudden departures of key team members; and uncharacteristic chasing or requests for additional payments.
If the worst happens, maintaining relationships with supply chain providers will be key, and direct payments should be considered. As a result of a main contractor’s insolvency, proactive construction management will allow trade contractors to recommence on site swiftly and restore stability, mitigating overall programme delay that may otherwise emerge from retendering.
Ben Kearns is head of Workman’s venture team