Contractor insolvency is continuing to dominate headlines with the recent announcement of the Stewart Milne Group entering administration. By August 2023 as many as 35 construction firms had gone under since June – 29 went under in July alone, six more than in July 2022.
With contractor insolvencies on the rise, we’re providing five essential tips to manage contractor insolvency in construction contracts and to avoid pitfalls. In all circumstances of insolvency, it is important to seek the right legal and commercial advice to avoid making a bad situation worse.
Prepare for action
The insolvency of a contractor can be a worrying time. Administrators will be seeking to recover as much cash as possible for creditors.
If a contractor goes into insolvency or administration, you must have a plan to recover and collate all documentation that may be relevant to assist with managing the project and assessing any claims from administrators. Make sure to also collect and review all contractual documents relating to projects, particularly any contracts that may have been “called off” under a Framework Agreement.
Once contractual documentation has been gathered, it’s crucial to consider the stage of the works: are works completed, partly completed, or not started at all?
Determining the stage of the works allows you to understand the consequences of the insolvency, including any termination procedures if relevant, as well as your potential liabilities in terms of outstanding costs to the insolvent contractor. You will also need to identify any works that may be required to be finished by another contractor and consider how that can be managed and completed.
Business as usual
While an administrator may have taken over the running of the company, all projects must still be managed and operated as per the terms of the contracts.
That means that all relevant contractual notices, such as payless notices, defect notices, or practical completion certificates, should be issued on time and in accordance with the contractual provisions.
Insolvency may provide a basis for terminating contracts. This needs to be undertaken carefully, as termination provisions are often complicated and required to be carried out to exact specifications, so take legal advice before doing so.
It’s vital to check how the contract has been administered throughout the life of the project. If there are any gaps in information (for example, missing names or addresses of key personnel) it may be that corrective notices are required before commencing any termination procedures.
Security or bonds
Consider if there is any other form of security that can be called upon in the event of non-performance of the contractor, such as a parent company guarantee or performance bond. Take all necessary steps to notify the providers of such security or bonds and your intention to call upon them.
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