26 January 2018

I am about to let a contract to a main contractor: what steps should I take to protect against main contractor insolvency?

There are a number of steps which a prospective developer or an employer 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.  However, there are some steps you can take including the following:-

  1. 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.
  2. 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.
  3. Using “vesting” agreements for higher value plant and equipment.
  4. Carefully consider any retention of title provisions.
  5. 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.
  6. 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% of the contract price. The terms of performance bonds need to be carefully considered, particularly as insurance companies frequently resist making payments out.
  7. On larger projects, consider a project bank account, although the terms of these need to be carefully considered, as do escrow type arrangements.

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About the Author
Sam Payne, Partner, Head of Restructuring & Insolvency Team
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