How can you minimise the impact of failures in the construction sector on your business?
In the year to November 2023, the total number of construction firms becoming insolvent was 4,370 – a 7% increase in the year to November 2022, and a 35.8% increase when looking at those in 2019.* Considering these alarming statistics, it is crucial for businesses in the sector, including customers and suppliers, to take proactive measures to minimise the impact of such failures on their own operations.
Warning signs to look out for
It is not always clear when businesses are facing challenges, but there are warning signs which can affect your supply chain:
- Signs of cashflow issues – these might be attempts to renegotiate payment terms, late payment of invoices, wages or subcontractors, inflated or early applications or aggressive invoicing.
- Industry discussion regarding their financial position.
- Announcements to shareholders or the market regarding profit warnings or financial stability.
- Staff issues such as high staff turnover, key personnel resignations, or staff being unexpectedly absent or removed from site.
- Late filing of accounts at Companies House.
- Issues such as poor-quality work, unexpected suspension or delays to projects, missed deadlines and slower performance of work.
- Withdrawal of credit insurance cover in respect of supplies to the company.
What can you do to minimise the impact?
If you have concerns about a company, you should act quickly. The key is not to leave things until it is too late to improve your position. The earlier you take advice on options to protect your business, the more options you will have.
These are some of the practical steps to take:
- Make sure you have good, complete records to help minimise losses on sites that close due to insolvency. You need to understand the position quickly, so have contracts, warranties and guarantees readily available. Your advisers will urgently need these.
- Have up to date schedules of equipment and materials you have on site, including which have been paid for. Identify any retention of title clauses that may allow you to recover goods that have not been paid for in full.
- Identify any contractual step-in rights you may have upon the failure of the company.
- Take legal advice, especially before terminating, novating or assigning any contracts. You could worsen your legal position and financial outcome if you get these wrong.
- Follow up payments due if you are owed money – issue statements and pursue actively.
Identify if you have any form of insurance cover or security to call upon in the event of non-performance, such as performance bonds or parent company guarantees. Ensure you meet any requirements specified to notify and enforce the security.
How can we help?
Our experienced cross-disciplinary teams navigate the challenges caused by disruption in the sector by advising you on how to best deal with the possible outcomes and minimise the impact on your business.
*Source: BCIS