Trevor Drury: self-preservation is crucial.
Survival tactics to manage risk
Published: 03 June, 2009
BRISTOL: With the volume and value of construction contracts falling, credit lines being shortened, slow payment practices rife and companies facing a reduction in turnover it's going to continue to be a challenging year.
Couple that with the fact insolvencies within the building and construction sector were up by almost a third last year and it becomes clear that the time for taking risks in business has long passed.
Watertight contracts and astute commercial management will be the key for businesses preparing to ride out the coming year, according to construction dispute resolution specialist Trevor Drury of Estia Consulting.
"The ripple effect of insolvency has seen many businesses pushed to the brink of their comfort zone. Now is very much the time to batten down the hatches, review existing paperwork and take preventative measures to avoid unnecessary risk," he said.
"As a starting point, it really is as simple as keeping your eyes peeled and your ears to the ground. Do your research.
"Check the financial status of the company concerned with data from a reputable credit reference.
"Look for whether there has been an increase in the number of days the firm takes to pay its invoices, a decrease in the amount of share capital or late filing of company accounts.
"Also be aware of 'real time' financial data; that is, the word-on-the-street. Rumours of late or non-payments to supply chain partners are generally a good sign of deep-rooted problems."
Don't be afraid of increasing contractual requirements and involving third parties Mr Drury advises.
"When trading with a subsidiary company ask for a Parent Company Guarantee (PCG) if the holding company is financially secure. This guarantee is free and should not add any additional costs to a tender but provides peace of mind.
"If a PCG is not an option, obtain a performance bond which is usually for 10% of the contract sum – ideally an 'on demand bond'- taken out with the contractor's bankers which minimises the risk as it can be called as soon as there is a default. If this is difficult to obtain alternatively, a surety bond should be sought from the insurance market.
"The premium quoted by the bondsman is generally a good indicator of the company's financial position as insurance companies rely on "of the moment market intelligence" to assess risk levels.
"With a surety bond the recovery of funds after a default can take time as losses must be proven, which is why an on-demand bond is preferable if it is available."
Common-sense precautions such as not paying for materials off site unless the appropriate vesting certificates are in place, stating that the title has been transferred to the client, that materials are stored separately and that they are labelled clearly (denoting goods are the property of the client rather than the contractor) are also important.
"Sub-contractors and suppliers should also ensure they have a retention of title clause in their contracts," he added, as this ensures that title in goods supplied only passes to the contractor or sub-contractor on payment in full and in the event of insolvency the receiver or liquidator cannot sell these materials to the benefit of other creditors.
He maintains self-preservation is a crucial objective for any business as insolvencies continue to rise and the future remains unpredictable.
For more information, view the Insolvency Report & Distress Index from Experian Business Information (February 2009) website.