Migrating the risk
The risk and impact of construction insolvencies is still something which is leaving an obvious mark on the industry. On 29 April 2015 The Insolvency Service of the UK Government published updated insolvency statistics which include a breakdown of insolvencies that occurred in 2014 across various industry sectors including the construction industry. There are separate tables of statistics for England and Wales and for Scotland.
The Scottish industry statistics show a total of 649 compulsory liquidations in Scotland in 2014 across the industry groups with 152 of those being in the construction industry: the Scottish construction industry therefore having 23 per cent of the reported compulsory liquidations, the equivalent of three per week and the highest incident of compulsory liquidations across all the industry groups.
ENGLAND AND WALES
The industry statistics for England and Wales show a total of 3,751 compulsory liquidations in England and Wales in 2014 across the industry groups with 578 of those being in the construction industry: the construction industry in England and Wales therefore having 15 per cent of the reported compulsory liquidations, the equivalent of 11 per week and the highest incident of compulsory liquidations across the identified industry groups.
These statistics demonstrate that compulsory liquidations are relatively high in the construction industry both in Scotland and in England and Wales. High profile insolvencies in 2015 impacting on Scottish projects have included Muirfield Contracts and Anglo Holt.
This raises a range of questions for those operating in and working with the construction industry including, what can you do to mitigate the risks and optimise your position should you be impacted by a construction insolvency?
MITIGATING THE RISK?
There are a number of issues which can be considered at the point of contract negotiation to assist in mitigating your risk in the event of upstream construction insolvency
(i.e. where the Employer or Main Contractor becomes insolvent):
Payment (Optimising Cashflow) – reducing or eliminating the need for deduction of a cash retention from payments under the contract or alternatively providing a retention bond rather than cash retention so that you receive the full amount included in interim certificates and/or the final account. You may also seek an advance payment for goods and materials which you require to put on long-order (against which an advance payment bond may be sought from you).
Payment (Timescales) – ensuring the terms of your contract are clear and the timescales for making applications and payment are as short as possible so that any cash flow implications can be managed.
Payment (Remedies) – including the right to suspend or terminate for non-payment and including a right to require evidence of financial arrangements with rights to suspend / terminate where no such evidence is provided.
Onsite Materials – seek to include a retention of title clause in your contract so you can claim ownership of the materials stored on site until certain obligations are satisfied (normally payment of the purchase price).
Other – protection can also be added through the inclusion of a net contribution clause to limit your exposure where the responsibility for a loss suffered as a result of a defect falls on you and another or others and/or the inclusion of a copyright licence which is conditional on the payment of your fees and/or by making sure that you get paid for all work done under collateral warranty ‘step-in’ provisions.
As evidenced, construction insolvency remains an issue for the industry but utilising some of the above options should assist where you are impacted by a construction insolvency.
September 2015 Issue