21 June 2018

Building work post-Carillion: what should I think about?

There are a number of steps which a school can take to minimise exposure to main contractor insolvency. None of these are a panacea and there is no substitute for careful due diligence and checking the contractor’s financial position, taking up references, and keeping a careful eye on the main contractor as the works progress. But there are some steps you can take, including the following:-

  • Having a proper main contract in place which includes rights to terminate on insolvency and a right not to pay until the works are complete.
  • Including provisions in the building contract giving you rights over materials and the right to enter the site to secure the project and any plant, equipment and materials on site in order that the project can be completed.
  • Using “vesting” agreements for higher value plant and equipment.
  • Carefully consider any retention of title provisions.
  • Having collateral warranties in place with key sub-contractors so that, in the event of main contractor insolvency, you can step in and take over the sub-contracts and so that you will not be over a barrel trying to get the sub-contractors to agree new terms with you.
  • Getting a performance bond and/or parent company guarantee in respect of the main contractor, although the latter will not be much of a guarantee if the whole group fails and most performance bonds only provide a sum equivalent to 10 per cent of the contract price. The terms of performance bonds need to be carefully considered, particularly as insurance companies frequently resist making payments out.
  • On larger projects, consider a project bank account, although the terms of these need to be carefully considered, as do escrow type arrangements. These are “locked down” accounts that ring fence large sums of money.

But the best way of addressing the risk is to keep an eye out for the warning signs. These signs will always be fairly transparent: delays in the works, low levels of manpower and dubious payment applications are all evidence of a contractor struggling financially. Early conversations and good payment practices across the site may help all of you get to practical completion safely.

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About the Author
Lucinda Baker, Partner
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