Contractor insolvency: what should you be looking out for?

11th October 2022

The construction press has recently been full of concerns regarding the risk of contractor insolvency. With current general economic uncertainty coinciding with what has now been several years of significant inflationary pressures for costs of building works and labour, financial pressures on contractors are particularly acute. Employers should be alert to risk signs, as should main contractors when assessing the position of their sub-contractors.  So, what should be looked out for?

  • Signs of potential problems could include a contractor’s employees not turning up on site, or worker numbers varying notably.
  • Delays in the delivery of materials to a site, or the quantities being delivered.
  • Keep an eye on the project programme to assess if the overall works or packages of works are in delay.
  • Is site security becoming an issue? Is plant, equipment or materials disappearing?
  • At times of financial stress workmanship quality can suffer, so watch out for a rise in defects.
  • Main contractors in particular often work on modest profit margins. Cash flow pressures can lead to additional demands to employers in regard to payments, requests for advances or the early release of retentions.
  • Cost consultants need to be reporting to employers on interim applications to flag unjustified claims for works, or unwarranted claims for extensions of time or loss and expense.
  • A contractor under financial pressure might have to make arrangements with its bank which include to assign over the benefit of payments.
  • Has the contractor filed its accounts and returns with Companies House on time?
  • Are communications with the contractor becoming confrontational – or even aggressive?

While none of the above in themselves are necessarily a sign of a contractor’s imminent failure, now is the time for employers to be closely monitoring contractor performance. The same can be applied by main contractors reviewing their sub-contract chain.

Early warning of insolvency risks can at the very least allow the opportunity to take preparatory steps and to better anticipate project delay and disruption.

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