Tips for dealing with construction insolvencies in the supply chain

Having to deal with construction insolvencies in the supply chain is a common  occurrence.

Insolvencies in the supply chain on construction projects were a fact of life during the recession, particularly among sub-contractors, and although the economy is growing again, such insolvencies are still happening.

Here are a few tips to help you deal with supply chain insolvencies.

Look out for warning signs

Project consultants will often be aware of impending insolvencies some time before they happen. Keep an ear to the ground for this sort of information, as the sooner you find out the quicker you can take pre-emptive measures.

Contractual obligations

When a contractor becomes insolvent, it makes sense to terminate any contractual agreement. However, the contract needs to be checked carefully, as not all contracts terminate upon insolvency and not all contracts will give a right to terminate in the event of insolvency.

Don’t be too hasty to replace an insolvent sub-contractor.

Although a replacement contractor will need to be found, it is sensible not to rush into a decision, as it is important to choose the right contractor, at the right price on the right terms.

Issues of ownership in the event of a contractor becoming insolvent

When a contractor in a construction project becomes insolvent, there are some important practicalities to consider when introducing a new/replacement contractor.

The contract needs to be checked for provisions that can deal with potential problems, for example: securing the site to prevent the contractor or their suppliers from removing materials; who retains title in the contractor’s materials and who owns the copyright in designs and how can they be obtained?

What are the monetary consequences of insolvency?

Typically an insolvent contractor will be entitled to payment for the works carried out before insolvency, whilst the employer will usually be able to set-off the additional cost of completing the works with a new contractor against any outstanding entitlements to the (now) insolvent original contractor.

However, such discussions can become protracted if consensus cannot be reached on a fair assessment on the status and quality of the contractor’s work upon insolvency and termination. The aim should always be to resolves issues with as little disruption as possible.

We provide solutions for Construction Insolvency Disputes and problems

In the David and Goliath world of chains of construction contracts it is easy to find stresses and contractual power imbalances. Slow payment, mismanagement and overcharging are endemic, put projects in jeopardy and expose the parties to the risk of financial collapse and insolvency.

The NDP Team is headed by Christopher Cox. He advises clients who are making or defending claims and faced with severe financial disruption as a consequence of construction and engineering project problems. Often the solution comes through a dispute resolution process, which is one way of solving the problem of sub-contractor insolvency as discussed above.

If you have a Construction insolvency dispute or problem, contact us for a FREE initial consultation.

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