Putting a spanner in the works of the construction insolvency cycle
According to the latest Office National Statistics release, there were 16,578 new company insolvencies across 10 industries in 2018 alone. Over 3,200 of these were in the construction sector, the highest of all the sectors and a 14.7 percent increase on the 2017 figures.
Construction has always been a difficult sector to survive in, with low profit margins and a risk of overambition. So, how can contractors of all sizes protect themselves against the ever-looming threat of insolvency?
Don’t push it
Overextending their remit can leave contractors and subcontractors vulnerable. It may be tempting to take on larger projects, but they can still come with lower profit margins and be just as high risk. The key issues are:
- Cash flow
Smaller main contractors and subcontractors who cannot benefit from bridging finance, development loads and project finance must depend on high-interest overdrafts. These can cause a variety of issues should late payments happen and even lead to the business being unable to continue trading.
Most companies want to grow and employing an experienced commercial director to plan a thought-out strategy for acquiring new business is a way to branch out safely and ensure that new projects are appropriate, from a risk perspective. A commercial director can assist with:
- Protecting commercial interests
- Decision making
- Mitigating damage
- Preserving profit
Develop trusted working relationships
Contractors must form good relationships with their subcontract supply chain. However, where monies applied for by subcontractors aren’t going to be paid in full, a ‘payment’ or ‘pay less’ notice must be issued, no matter how solid the relationship is. If this isn’t done, it creates the risk of a ‘smash and grab’ adjudication.
Keeping clear records is essential to managing disputes correctly, if they arise. This includes records of:
- Contractual notices
- Meeting minutes
Disputes commonly arise when conversations about project changes haven’t been documented properly or communicated effectively. As a result, it is vital to talk about these issues as soon as they arise.
The construction sector relies on collaboration and communication between parties. It may be a competitive industry where disputes and insolvencies will always occur, but that doesn’t mean the sector can’t thrive, even during uncertain times.
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