What to Consider if Your Contractor Goes Bust

As a result of the pandemic, we have seen, and advised on, numerous instances where main contractors have downed tools or closed sites. In some cases, this has been a temporary hiatus to construction works as we and our client employers have persuaded or assisted main contractors to return to site. However, we have unfortunately seen occasions where the contractor has gone bust and never returned to site.

If faced with contractor insolvency, we set out below what you need to consider and those matters with which you may need to deal:

1. If you have a funding agreement, notify your funder of the contractor’s situation. Buy yourself some time with your funder to give you breathing space to work out how any outstanding works are to be completed.  Remember that most funding agreements will contain obligations requiring you to provide information (such as news of insolvency) to the funder in a timely fashion.
2. Immediately secure the site and materials on it. Ascertain what you have paid for in full, what is part paid for and what are contractor or sub-contractor assets on site.
3. Prepare a detailed valuation of the works and, if you have one, request the contract administrator to undertake a formal valuation. Ascertain the works to be completed (including any defects not yet rectified), revise any works programme (including ascertaining what is on the critical path), calculate the costs to finalise the works, whether extra funding will be required to finalise them and any disputes about the works already existing.
4. Check insurance coverage and insure the site, the works and check the insurance position in respect of any third party assets to remain on site. The contractor will likely have carried public liability, employers liability, professional indemnity insurance (if providing design) and contractor’s all risk insurance.  These may come to an end with its insolvency or termination of the building contract (see below).  Decide what insurances you will need in place for the future of the project. Also check any insurances you have in place in respect of the project and whether they require you to inform your insurer of the main contractor’s insolvency.
5. Check the contractual documentation:

• Be it a JCT contract, NEC form of contract or bespoke agreements, they should set out provisions for termination on insolvency of the main contractor. Follow the provisions of your contracts to the letter to formally bring your contract with the main contractor to an end, especially where you want to engage a new contractor to finish any works or oversee their completion yourself.
• Is there a parent company guarantee or performance bond you can claim under? Have the trigger events in such agreement occurred?
• Do you have any collateral warranties from subcontractors? These may assist you and give you step in rights to take over vital supply chain contracts.

6. Make immediate checks to ensure that documentation for which the contractor was responsible can be located and is up to date (eg health and safety records, drawings, test certificates, manufacturers’ warranties etc).
7. Unless commercially imperative, do not make any further payments to any party about the works until you know your full position.
8. Decide how any outstanding works are to be completed after formal termination of the main contractor’s contract. Generally, the options will be a new main contractor or the employer or a construction manager to manage the existing or new sub-contractors. Agree a new contract with a new main contractor (likely to be on a cost plus basis) or with a construction manager.
9. Take advice as to whether you have any claims against the main contractor and whether these are commercially worth pursuing.

The first days after a main contractor has entered into some form of insolvency procedure are critical and it will be an intensive time of information gathering and decision making. It is however hoped that you will have seen some of the warning signs that your main contractor may be in difficulty (eg less activity on site, slow or late deliveries, plant or equipment disappearing from site, requests for accelerated payments, programme issues, persistent rumours about the main contractor’s financial position including sub-contractors and suppliers not being paid, late filing or qualified accounts being filed at Companies House and a new evasiveness in communications) before they go bust and you have been able to undertake some pre-planning before their insolvency occurs.

By Ian Timlin of Conexus Law

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