Insolvency-proofing your contracts
Contractor insolvency has plagued the public sector since the global financial crisis of 2007. Carillion, the latest company to go into administration, were reported to have over 450 public sector contracts, many of them outsourced to smaller companies.
Here's how social landlords protect themselves from the damaging effects of contractor insolvency. Most public sector contracts will need to be advertised in accordance with the Public Contracts Regulations 2015. Contracting authorities can use the Regulations to interrogate the financial standing of bidders, and can require bidders to demonstrate a minimum financial turnover to be able to tender. The Crown Commercial Service has advised that bidders should not be disqualified solely for a failure to achieve minimum thresholds, and that a number of factors should be considered when assessing bidders' financial status. However, contracting authorities should be able to use minimum thresholds to exclude bidders, provided that they have valid reasons for doing so.
Where companies are bidding as consortia or relying on the resources of other companies, contracting authorities can request and assess the financial status of those third parties. Bidders can be required to agree to enter into parent company guarantees, performance bonds or other securities as a condition of being awarded the contract. Any forms of guarantee and bonds should be provided to bidders at tender stage, to avoid having to negotiate separate terms with each bidder. Social landlords should also seek collateral warranties from key supply chain members, with step-in rights to allow direct instruction of the supply chain in the event of contractor insolvency.
Contract documents can be drafted to require contractors to demonstrate financial security at regular points, and/or to allow employers to undertake their own financial checks on contractors. Social landlords should also require contractors to pay their sub-contractors within 30 days of an undisputed invoice (in compliance with Regulation 113) and report on their success rate. Continued vigilance of a contractor's financial health should help prevent surprise insolvencies, or at least give social landlords sufficient time to mitigate any risks.
Most standard-form construction contracts allow employers to terminate the contractor's appointment in the event of contractor insolvency. These terms vary depending on the contract being used: the JCT and NEC suites require employers to give contractors notice of termination, whereas the PPC and FAC-1 contracts provide for automatic termination of the contractor's appointment. Social landlords should pay careful attention to termination and notice provisions and follow these to the letter, to avoid any claims of wrongful termination.
Many contracts only allow termination at the point of actual insolvency. Social landlords can consider amendments to allow termination at an earlier stage (eg, when the contractor takes steps to appoint a liquidator/administrator).Contracts should provide for the employer to re- take possession of building sites and materials, and allow remaining work to be awarded to third parties to prevent delays. Ideally, the contract should allow employers to stop payments after termination, and set-off their own costs against any sums still owed to the contractor.