Financial distress on global construction projects

Why should I read this? 

Financial distress in a construction project can have significant repercussions. In the worst case, a main contractor, sub-contractor or supplier may become insolvent and be unable to perform their works. This can cause delays and additional costs and can have wider repercussions if the supplier of specialist and/or bespoke plant is no longer able to supply; there may be the need for significant re-design and/or revision of certain performance metrics. There are rarely any winners out of such a scenario.

Although insolvency of a main contractor will often permit the employer to terminate the contract and employ others to complete the works, the resulting delays and additional costs may be better avoided.

What can I do if my project is in financial distress

Being alive to the warning signs and taking pro-active steps to identify and manage issues before or as they arise can help mitigate the impact.

These signs are not necessarily evidence of financial distress – there may be good explanations for them – however, they are common warning signs that often precede insolvency.

These may include the following:

• failure to pay sub-contractors/suppliers. Sometimes sub-contractors/suppliers will bring this to the attention of an employer. However, sometimes this will manifest itself through late deliveries or slow performance by sub-contractors. In extreme cases, subcontractors/suppliers may try to remove equipment or materials from site

• there may be unexplained delays to progress or missed deadlines. Sometimes a contractor may try to mask such delays by submitting claims for extensions of time, seeking to excuse the late performance. A critical review of the claims may reveal that they have been made on spurious grounds to hide the true reasons for the delays

• reduced labor numbers and/or loss of key personnel. Again, it is important to distinguish between reduced numbers to suit the available work on a project (where, again, a contractor may try to blame the employer for a lack of available work-fronts) and labor which is clearly much lower than it should be to progress the works

• frequent changes in personnel. Not all personnel changes are indicative of financial distress. However, sometimes those working within a company have a better idea of the state of the finances than those on the outside and may move to better prospects

• lack of communication with no apparent reason, particularly around progress reporting (e.g. updated programs)

• unjustified demands for early payment or increased claims for payment out of proportion to the progress/materials on-site

• frequent quality issues and instances of cutting corners

• there may be wider ‘noise’ in the market as well, possibly profit warnings in the case of listed companies or short-selling of stock

Again, not all of these warning signs will be due to financial distress. However, often a number of warning signs occur to give an overall picture that things are not quite right.

Are there any other practical steps I can take?

If you observe these warning signs, or otherwise have concerns, there are practical steps that can be taken to try to avoid the contractor insolvency or, if that fails, to mitigate the effects as best as possible.

Being prepared can make a significant difference to the financial and delay impact of a contractor insolvency. However, it is important not to take any steps that pre-determine the outcome (for example) as that could be a breach of contract by the employer.

Practical steps may include revising payment terms (with appropriate protections in place), revising the contractual arrangements, serving notices and keeping the right records in place in the event things do go wrong.

Our global team has extensive worldwide experience of assisting clients navigate through potential and actual supplier insolvency and can work with you to try to provide practical solutions to mitigate the risks.