Court data indicates that the collapse of Carillion in January 2018 has fuelled a rise in disputes as companies throughout the supply chain try to minimise the knock-on effects of insolvency. Zoe Stollard, a partner in national law firm Clarke Willmott’s construction team, looks at the importance of getting the fundamentals right to avoid disputes in construction further down the line
Firms are being urged to promote better internal governance and assurance and to take steps to ensure their businesses are more risk-averse following an analysis of the collapse of construction giant Carillion and the ongoing trend of struggling construction businesses.
Disputes in construction reaching the High Court have risen for the third consecutive year to almost 400 cases with owners, contractors and suppliers all still continuing to experience tough trading conditions.
A rise in dispute claims
According to advisory firm Accuracy, which analysed the court data, the collapse of Carillion in January 2018 has driven a rise in claims throughout the supply chain between owners, contractors and suppliers, all eager to recover cash and mitigate the impact of other collapses.
With the trend set to continue, a more prudent and assertive approach may be necessary in identifying risks for construction business before signing on the dotted line.
Ongoing financial concerns are prevalent not only to large construction firms, but to construction firms of all sizes and across the country. This continues to be highlighted by the profit warnings that have been issued in recent years from groups like Kier and Galliford Try.
It is therefore essential to understand your potential clients and partners to ensure the relationship you are getting into is one that will be reciprocal. This means checking the soundness of proposed designs, upskilling where appropriate, and scrutinising contracts for potential risks and problems.
Triggers for insolvency in construction
Along with lack of profitability and tight margins, some of the main triggers for insolvency in the industry are payment issues and bad debts, which can cause problems with ongoing projects.
Checking the wording of a contract so that it clearly sets out how payments should be dealt with, together with actually implementing the provisions of the contract, is of the utmost importance.
A company can give itself a better opportunity of success by ensuring that sufficient governance and assurances are in place in respect of any payment due under a contract.
While this may seem basic, all too often we see issues arising around requests for payments and the valuation of an application, simply because notices are issued incorrectly, or are not issued at all.
Getting the fundamentals right can help avoid unnecessary and protracted disputes – and unwanted legal fees!
Without proper consideration, the profits that can be made across multiple projects can just as easily be wiped out by a single bad project.
Taking a minute to stop, however, and thoroughly consider the assurances and contingencies that are in place, together with the advice of the wider project team, could be the difference between securing a profit on a project, or absorbing a significant loss.
According to Accuracy, the UK’s specialist Technology & Construction Court heard 397 disputes in construction in the year ending 30 June, the third consecutive annual rise.
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