(Image source: St Hilliers)
A staggering 2,349 construction firms collapsed in 2023, an annual record and unfortunately, this trend looks set to continue.
The "perfect storm" of high interest rates, soaring material costs, and an ongoing worker shortage in the Australian industry has sent main contractors and tradies into freefall.
For solvent contractors, this brings opportunity; it reduces future competition in the market and provides scope to increase their market share by purchasing such companies. However, there is still a risk that a contractor may go insolvent, leaving construction contracts in limbo and a poor commercial situation.
We have been reviewing several practical steps that we could take to help reduce the risk to the employer and have outlined these below:
Before Tendering / Negotiating with Contractors
Carry out credit checks on proposed contractors.
Consider procuring a latent defects insurance policy to cover the costs of defective work that the insolvent contractor may leave behind.
Procure a parent company guarantee and performance bond.
If a performance bond is unavailable, consider increasing the retention on the project; the contractor should be aware of this as early as possible.
Avoid advanced payments and appoint an independent AIQS-accredited surveyor to assess the completed work.
Ensure subcontractor warranties have step-in rights, allowing the employer to employ the subcontractor directly after the main contractor's insolvency.
Procure the insurance for the contract works.
During the Project
Regular credit checks to understand the contractor's current position
Request management accounts for the previous 6-9 months.
Procure works to immediately secure and protect the site in insolvency.
Check that the contractor's insurance policies remain in place.
Regular progress checks on site should be conducted to identify labour shortages and work not progressing or stopping.
Understand the terms of the building contract and any options available for termination.
Ensure payments are closely monitored, and the appropriate notices are issued at the right time to avoid overpayment.
Ensure third-party inspections on essential packages are employed directly and not through the contractor.
We cannot always predict the likelihood of risks during a project; however, we can take reasonable steps to reduce the impact.
For more information, get in touch with our Managing Partner, Michael Nixon, via the details below:
M: 0482 905 300
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