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Insolvency of a Building Contractor – Practical Tips

Nick Cook, Senior Associate in the Dispute Resolution department at City law firm Goodman Derrick LLP, comments

Of all the many and varied issues which can beset a building project, perhaps the most serious is the insolvency of the contractor. The project will immediately grind to a halt, with all the knock-on effects of a potentially serious delay to completion, and there may well be significant financial consequences too.

What is insolvency?
Insolvency is defined as the inability to pay debts as they fall due. Construction is heavily reliant upon cash-flow, with suppliers, sub-contractors and workers having to be paid regularly in order to keep the project on track, and it is therefore easy to see how even fairly minor disputes or delays in payment can potentially push a contractor over the edge into insolvency.

What to look out for
Needless to say, your contractor may well not share the fact that it is experiencing financial difficulties with you. Indeed they might be operating under the assumption (or hope) that their difficulties are temporary, and that they can trade their way out of the hole. What this means is that when it does not work itself out, and they have to call in an Administrator or a Liquidator, it can all happen very suddenly from their client’s point of view. It could even be that one day the workmen simply fail to show up to site, leaving you wondering what is going on.

As such, you should keep an eye out for warning signs, such as work slowing down against the programme for no apparent reason, or the contractor asking you to make more frequent payments. If you notice that there are suddenly fewer workers on site, ask the contractor why, and also ask yourself whether the explanation makes sense in the context of the current stage of the project. Sometimes it is nothing to worry about; there might be a genuine delay in having some key materials delivered, or they might need a specific sub-contractor (e.g. plumbing, or electrics) to finish their works before they can carry on with the main works.

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