When a Builder Fails: Protecting the Client From Contractor Insolvency

by | Oct 20, 2008 | Contract Administration and Major Works

For clients with a building project on site or about to start, the events of September and October 2008 raised an uncomfortable question: what happens if the contractor goes under? After the collapse of Lehman Brothers in September 2008 and the government’s bank rescue package announced on 8 October 2008, credit was tight and many firms in construction were under pressure. Clients can reduce the risk considerably with some simple steps.

Before you appoint

  • Check financial standing. Look at published accounts and credit reports for every tenderer, not just the cheapest.
  • Be wary of very low prices. A bid well below the others may reflect an error or a firm that needs work at any price.
  • Ask about subcontractors. A contractor relying on a few key subcontractors is exposed if they fail.
  • Consider security. On larger projects, a performance bond or a parent company guarantee may be appropriate.

During the works

  1. Never pay ahead of the work. Interim valuations should reflect work properly done and materials on site, nothing more.
  2. Keep the retention. It is there for a reason.
  3. Be careful with materials off site. Pay for them only where the contract allows, ownership is clear and the goods are properly identified and insured.
  4. Watch for warning signs, such as falling labour numbers, unpaid subcontractors, deliveries drying up or requests for early payment.
  5. Keep records up to date, so the value and state of the work can be established quickly if something goes wrong.

If the contractor fails

Act quickly but carefully. Secure the site, check the contract’s termination provisions, and take advice before serving any notice. A record of the work done, the payments made and the outstanding defects will be needed to complete the work with another contractor and to calculate what is owed. Standard forms such as the JCT contracts deal with insolvency, but the steps must be followed correctly.

How we help

A well run contract is the best protection. We check tenderers, value work accurately, keep careful records and act promptly when problems appear. See our Contract Administration service, and our work on nine new homes on a backland garage site.