Protecting against Contractor Insolvency
In the current economic climate the risk of a contractor getting into financial difficulty during a construction project is a very real one. How best can the employer try to protect itself against that risk?
There are a number of contractual provisions which can be employed to reduce the risk. Many of these provisions are included in the standard forms of Building Contracts such as the JCT and PPC 2000 Contracts. However they are not always included in the taylor-made forms of Build or Development Agreements which many RSLs use for some of their housing schemes.
There follows a list of various provisions and requirements many of which it may well be appropriate to include in order to maximise protection against contractor insolvency:
Financial Provisions
• Consider using a project bank account. Although this may involve some hassle and expense to set up it may avoid funds intended for the contractor’s sub-contractors disappearing into an insolvent contractor’s account
• The Building Contract can provide that in the event of contractor insolvency:
* the employer may appoint a new contractor, and deduct the additional costs incurred in doing so from any sums the employer may still owe to the original contractor
* the employer is not required to make any further payments to the contractor until the building works have been completed
* the employer may, in discharge of amounts which would otherwise be due to the contractor, make direct payments to consultants, sub-contractors and suppliers engaged by the contractor
• Consider varying the stage payments so as to reduce the amounts payable to the contractor in the early stages and load them towards the end of the project. This may cause the contractor to increase the build price but that may be a cost which the employer is prepared to bear for the increased security
Termination
• Include an express provision in the Build Contract for it to terminate in the event of the contractor becoming insolvent and consider including provisions to permit
• termination even before insolvency, for example in the event of the contractor unreasonably stopping work on site for a specified minimum period
Guarantees, Bonds and Warranties
• If the contractor has a parent company of financial standing consider requiring a parent company guarantee
• A performance bond given by a bank or insurance company, usually for 10% of the build price, will provide some compensation in respect of the additional costs which will inevitably be incurred if a new contractor has to be engaged part way through a project
• Ensure that the contractor is required to produce at the beginning of the project collateral warranties from sub-contractors and consultants, and make sure that each warranty includes “step in” rights for the employer to take the place of the contractor in the event of the latter’s insolvency
Plant and Materials
• Building Contracts may include provisions in respect of plant and material e.g. giving the employer the right in the event of contractor insolvency to take possession of plant and materials on site for the purpose of using them to complete the project and/or selling them in order to pay off suppliers, sub-contractors etc who are owed money by the contractor
Copyright
• Include in the Build Contract a contractual right for the employer to receive copies of the contractor’s drawings and specifications and use them for the purposes of the project
The above is a brief overview of some of the main ways in which the risks posed by the possibility of a contractor becoming insolvent can be reduced. The issues are not always straightforward and careful drafting of the relevant contract provisions is essential.
For advice on the matters mentioned in this article please contact Simon John on 01392 666887
Simon John - Associate
simonjohn@stones-solicitors.co.uk
Simon was originally a Chartered Quantity Surveyor and has since qualified as a Solicitor. He has substantial experience in site acquisition and other property matters for housing associates. Simon joined Stones from Freeth Cartwright in Manchester.
Exeter: 01392 666777
Okehampton: 01837 650200
www.stones-solicitors.co.uk
mail@stones-solicitors.co.uk