Contractor insolvency – what to do next?

A guide for Project Managers, Contract Administrators and Quantity Surveyors

2020 has been a difficult year for the construction industry, emerging positively from Brexit only to be hit by the worldwide pandemic of COVID-19.

This has presented a number of challenges across the sector and sadly, for some contractors, this will result in them going into administration, leaving projects incomplete and clients’ consultants having to act swiftly to minimise the damage.

This is one of a series of Hollis briefings on how to manage some of these project challenges and safeguard our clients’ interests.

In this short guide, we summarise the key actions that Project Managers (PMs) / Contract Administrators (CAs) and Quantity Surveyors (QS) should do when a contractor goes into Administration whilst a project is on site.

Actions by the PM / CA Actions by the QS

Obtain formal notification of insolvency from the contractor

The contractor is obliged, under the contract, to notify the client they have gone into administration.

Stop pending payments

Immediately advise client that pending payments should be stopped.

Issue formal notice of termination

Important that the contract is formally terminated, following the procedure set out in the contract with notification either hand delivered or sent by recorded delivery.

Prepare a valuation

Undertake a valuation of the works complete and materials on site.

Secure the site

Make immediate arrangements to secure and protect the site including all temporary buildings, plant, tools, equipment and site materials.

Materials on-site

Identify any materials on site that have not yet been paid for and remain in the ownership of the supplier.

Record site condition and progress

Commission a photographic record of site conditions and the works.

Materials off-site

Identify materials vested off site and ensure payment has been made.

Insurance

Advise the client on requirements for insuring the site.

Procure a contractor to complete the work

Work with the PM/CA on procuring a contractor to complete the works including making good any defects.

Communicate

Issue stakeholder communication and updates during the period until the contract is fulfilled.

Final statement

Within three months of Practical Completions, prepare a statement for the employer to include all expenses incurred in securing the site and re-procuring the works, costs to complete the works, sums paid to the original contractor, total amount that would have been payable had insolvency not occurred. Balance will be a debt owed by the contractor.

Bonds and PCGs

Confirm employers rights to claim on bond or PCG.

Information

Download copies of information stored on contractor controlled portals / data rooms.

Procure a contractor to complete the work

Following terminations, arrange to procure a contractor to complete the works including making good any defects.

The way contractor insolvency is dealt with will differ slightly between contracts, so always read your contract carefully including the amendments and the definition of insolvency.

Time is of the essence and following formal notification of contractor insolvency it’s critical that the consultant team move swiftly to secure the site and protect the clients’ interests.

This issue reinforces the need to ensure that you have your security documents – bonds, Parent Company Guarentee (PCG) and warranties signed as early as possible when the project commences so they can be called upon if required. It’s also important to make sure all project information from the contractor is up to date.

Once the contractor goes into administration, it will be very difficult to obtain any project drawings, documents and the like.

Key actions for the PM/CA and QS

Early signs to look out for

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Contractors requesting more frequent payments to help with cashflow

Contractors QSs may request for payments every two weeks rather than monthly and valuations submitted may be inflated above the value of the works actually completed.

Sub contractors reporting they are not getting paid

Sub contractors are often first to feel the pinch if main contractors are running into trouble financially and can be the first indication that the contractor is having issues with cashflow.

Contractors having problems getting credit from suppliers

If suppliers are having issues getting paid, then credit may not be forthcoming to contractors and may be an indication that they are beginning to have financial issues.

Problems with getting materials to site

Programme may be affected if materials are late or not being delivered. The source of this issue should be investigated to ascertain whether the core problem is the contractors ability to pay for the materials.

Over inflated valuations and increases in claims for additional costs

Contractors QSs are likely to be under pressure to improve cashflow if a contractor is experiencing financial difficulties. This may lead to over inflated valuations being submitted or increased claims for additional costs in an attempt to improve cashflow.

Top tips

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Make sure your security documents are in place as soon as possible. This means bonds, parent company guarantees, warranties and the like. They should be executed and in place as soon as possible when the contract is completed. If they haven’t been executed, they can’t be called upon if the contractor goes into administration.

If you are notified that a contractor has gone into administration, always read your contract first to understand the specific requirements of that contract and its definition of insolvency. The contract will set out clearly the steps to be taken which must be followed to the letter.

Make sure that formal termination of the contract is followed directly as set out in the contract. Just because the contractor has gone into administration, doesn’t mean that you don’t need to formally terminate the contract. This is an important step to progress and must be undertaken in a manner set out clearly in the contract.

Ensure copies of project information are up to date, particularly on design and build projects. If a contractor becomes insolvent it may be very difficult, if not impossible to retrieve information held in contractor-controlled data rooms.

Consider at the outset of a project whether a bond or a Parent Company Guarantee (PCG) is required. If the parent company becomes insolvent then the PCG won’t be of any use. Bonds are provided by third parties and potentially offer greater security.

Scrutinise materials off-site and ensure that vesting certificates are in place and the materials have been paid for, are appropriately stored and clearly marked as the property of the client.

How can we help?

Our specialist teams and industry leading experts can be brought in to assist in the event that a contractor goes into administration. These include…

Photographic schedules of condition

Drone surveys of sites, undertaking detailed aerial views of site

conditions, progress of the works, materials on site, and plant and equipment retained on the site.

Materials off-site inspections

Independent valuations of works complete to date

Condition surveys and identification of defects requiring rectification

Mark SmithPartner

Ian ShawPartner

T: +44 7767 886039E: ian.shaw@hollisglobal.com

T: +44 7741 904458E: mark.smith@hollisglobal.com

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