The importance of efficient and effective project recovery
If a project is affected by contractor insolvency, the default position is to recover the project. Developers should act quickly if a contractor fails. Contacting your construction insurance broker and provider should be a vital part of your strategy.
The checklist is detailed and varies from company to company. For guidance on next steps, review the following. Your construction insurance broker can provide further advice on policy-related matters and, where needed, engage insurers and risk engineers.
Site security: Focus on the small print
Before terminating a contract and mothballing the site, review the contract to establish whether the contractor is legally insolvent. Most insurance contracts include clauses that automatically cover cessation of work, but details vary, including reporting requirements.
Once the contract is terminated, secure the site immediately. Conduct an audit of plant, equipment, goods, and materials, and put procedures in place to prevent unauthorised removals. Arrange a new security contract and set up surveillance measures, such as CCTV. A weekly monitoring system will help ensure the site remains secure and free of fire, safety, or water-damage issues.
Materials storage: Be meticulous
It’s time to work out who owns the goods. Is it a supplier that’s not been paid? A subcontractor storing goods off-site? Or a contractor storing goods on-site?
Ownership of unfixed goods off-site can be complex. Construction contracts aren’t governed by the same legislation as sale contracts, so the intended transfer of ownership upon payment might not be enough.
Building contract: Get the facts right
Scrutinise contractual documents. The contract should set out provisions for termination in the event of the main contractor’s insolvency, whether under a Joint Contracts Tribunal (JCT), New Engineering Contract (NEC), or a bespoke agreement. The developer must adhere to these provisions to terminate the contract. This is imperative if the developer plans to hire a new contractor to complete the work or to complete the project themselves.
Supply chain and subcontractors: Consider legal advice
The status of key subcontractors and suppliers depends on whether the main contractor’s employment is terminated. If the main contractor continues to complete the project despite insolvency, key subcontractors will proceed as usual.
Seek legal advice if the employer intends to make direct payments to subcontractors, as this might conflict with the principle that assets should be shared equally among an insolvent company’s creditors.
Project insurance: Work with a construction insurance broker
Assess how the site and any incomplete works are insured. When a contractor is required to insure the works and site, this obligation might cease or become non-compliant upon insolvency.
Typically, the contractor holds contractor’s all-risk (CAR), public liability, employer’s liability, and professional indemnity (if providing design) insurance. Developers will need to consider which of these covers need to be put in place immediately. Additionally, insurance for construction plant and equipment and/or site accommodation should be considered.
Work with your construction insurance broker to determine the strategy needed to protect the project’s future.