Adjudication and administration: Show us the money

In the past year I have successfully represented main contractors in four adjudications only to find the clients fall into administration before making payment in accordance with the decision. These were not insignificant sums either with two awards being in excess of £500k.

The “big boys” can normally ride out such a hit, and in any event should know better than to let such a situation arise. However, for the regional contractors and SMEs such a knock is often fatal causing them to additionally find they cannot meet their own financial obligations and fall themselves into administration.

I know how it happens; I used to be in main contracting. The attraction of a project if it goes well could make you a 10% plus gross return; you have a site team sitting on their hands in the office, with a quick start you could fill the gap in your turnover and profit for the year.

Such enthusiasm to win the project, however, often causes the good business bible to fall into a muddy trench, leading to any financial governance being forgotten about. Well here is a brief reminder of the basics:

Assuming the client is a commercial enterprise, obtain the last three years published accounts. If you are not sure what they mean, get advice from an accountant. Ultimately you are interested in the net worth of the company, how successful it is, how the structure of the company is set up, and so on.

If it makes grim reading, why would you want to do business with them? Perhaps use the information gained as leverage to try and seek some form of commercial protection.

If the company you are going to be contracting with has an ultimate or parent company, why not ask for a parent company guarantee. Then in the event of a breach by your client (say, non payment), the parent company is legally obligated to remedy the breach. If you’re proposed client is reluctant to enter into such an agreement this should start the alarm bells ringing.

If you want a domestic mortgage nowadays and you are lucky enough to have a decent deposit, often the mortgage company before proceeding will ask to see evidence of the deposit and where the funds came from. As a contractor should you not do the same?

If a client is undertaking a reasonable sized project, is it not eminently sensible to know they have the funds or at least a commitment from a funder to provide such funds? While such evidence (say a letter from the funder) will not hold any contractual significance, it should still provide some comfort.

Funder guarantees if worded correctly can be a hidden gem. Obviously they exist for the benefit of the funder, but they can help you too. The key to this is in the event of the funder instigating its right to step into the shoes of the client, it will remedy any existing client breaches prior to the date of stepping in. Obviously the key issue is any unpaid sums due under the building contract. Such a condition is unlikely to exist in the draft of the guarantee they produce however; you will have to ask for it.

An escrow account provides visibility of employers funds in a “ring fenced” bank account set up specifically for the project. An agreed minimum sum is maintained (say the value of two projected monthly valuations), which can only be drawn down against by the monthly valuation certificates. This allows the contractor the benefit to see the funds are available before undertaking the works. It is advisable to seek specialist advice to ensure the escrow account is correctly set up.

Whilst project bank accounts are more for the benefit of the downstream tier 1 supply chain, benefits do exist for the contractor. Acceptance by an employer to adopt such a payment arrangement shows it is committed to making payments. Additionally even if things in the future do go wrong, with payments having been made to the supply chain, the liability of the contractor should be substantially reduced.

Shortened payment periods and reduced retention sums are simple steps that can significantly reduce a contractor’s (or indeed subcontractor’s) non-payment exposure.

Although the recently published Fair Payment Charter is no doubt a step in the right direction, it should be remembered it is voluntary. Unscrupulous clients with limited funds are most unlikely to sign up to such a commitment, and why would they? The phrase “turkeys voting for Christmas” springs to mind.

And finally, please don’t accept any clause that in the event of an upstream insolvency the client does not have to pay you that part of the money the client did not receive. The new Construction Act gets it wrong in not outlawing such draconian practices.
Taking the steps outlined above will certainly not guarantee the purse that pays you is never going to be empty, but at least you will have mitigated such payment risk.

Gary Sinden is a director of G Sinden Consult Limited