Strategies to avoid or minimise the impact of construction company collapses on you
24 August 2017
In February 2001, one of our largest construction companies Hartner Construction collapsed taking many subcontractors, employees and clients in its wake. Twelve years later, Mainzeal, another major player has followed the same path. Some people learned from Hartner and many learned from Mainzeal.
Collapses such as these directly impact not only stakeholders, employees, suppliers, subcontractors and customers but those down the chain which are stakeholders, sub-contractors, suppliers to the businesses which do not survive the fallout.
Industry participants which have been burnt or even lucky enough to have avoided impact through astute management need to learn how to avoid and protect themselves from fallout.
Different strategies are useful for different groups of stakeholders. They include:
- Seek up to date information - Talk to owners, employees, others on the building site and in the industry. If there are concerns about cashflow, slow payment, unprofitable jobs, large claims, etc people in the industry usually have a general sense of what is going on and spot the early warning signs.If you are very reliant on a company and in a position where you can exert influence, such as a customer with a large project or a contractor relying on a key subcontractor, ask for financial information until you are satisfied.Sometimes this can be achieved by an independent accountant reviewing information to retain confidentiality.
- Be skeptical - Don’t assume everything is fine. Seek and consider the information available. Is it consistent or inconsistent? What are the trends? Do others have concerns? What is the character and reputation of the people? If there is a major problem there are usually warning signs.
- Be decisive - If you obtain concerning information, seek more or better information, make a decision and implement it. Many people had concerns or were aware of rumours in the market prior to the high profile collapses but only some took specific action to minimise their risks.
- Constantly manage your risks and vulnerability - If you run a construction company operating on a 5% margin you need to do $2m of work to recover a $100k loss. If you are at the tight end of the market at 2% margin you need $5m of work to cover that loss. This sharpens your mind to ensure losses do not occur and exposure to large debtors is minimised.
- Assertively follow up and collect debts if they are overdue -Adequately resourced companies can pay by due date. Don’t expose yourself to large debts or dominant customers.
- Register a security interest on the PPSR (Personal Property Securities Register www.ppsr.govt.nz) - This is only helpful for some suppliers and is still fraught with legal challenges. It is not a substitute for remaining alert to the risks.
- Seek a bond if achievable -Not everyone can get a bond. The cost may need to be priced into any contract. They are not usually a simple solution and often involve a long, complex legal process to recover from a bond. They are problematic for the industry as banks and insurers seek security which can tie up the cash resources needed to perform the contract and, at the extreme, may exclude the most suitable contractors.
- Negotiate retentions wisely - Retentions are problematic for the industry and have been used for decades for both good and bad reasons. Many head contractors have relied on them to assist propping up their cashflows which can result in subcontractors increasing margins to balance their short term cashflows. If they are inappropriate or the terms are inappropriate, endeavor to negotiate on a more realistic basis.
- Avoid accepting contractual obligations you cannot control -It sounds simple, but read the fine print and ensure you are happy or risk being sucked or bullied into a contractual situation that is difficult to exit when the other’s performance impacts on yours.
- Invoice promptly and correctly - Don’t be late or incorrect which could cause you to be missed in the monthly payment cycle or allow excuses for non-payment.
- Remember the sale is not complete until the money is in the bank -Ensure you have every expectation of being fully paid before you accept a contract.
- Ensure all your subcontractors can perform - This is particularly important when they are doing or have done work for others that have not paid or can’t pay. If they run out of cash for the wages they may not be able to complete your contract and drag you into liquidated damages and loss of reputation.
- Be prepared to cut off credit until you are paid - But watch out for onerous contract terms that stop this being effective.
- Associate with reputable businesses - Use reputable subcontractors and work for reputable customers. Relationships developed in this environment are better for ongoing business and minimise the risks of rogue operators. Trust and knowledge is built which helps keep away from trouble or identify problems earlier.
The vast majority of businesses are properly run and can pay their creditors on a timely basis. Our industry is probably in a better shape than Australia’s and for responsible and capable operators, offers a great outlook for the next few years.