The news is rife with economic gloom, but if you are entering into a contract or are already in contract, what steps should you as a prudent company be taking to minimise risks in relation to current projects?

Clearly due diligence in respect of your contracting party at the outset is vital, as is careful consideration of the commercial terms governing payment, the desirability of extra security (performance bonds, parent company guarantees), payment arrangements (payment periods, advance payments/bonds, levels of retention and separate bank accounts) and a general assessment of the risk profile of the contract.

Having got into contract however, despite all the best due diligence and cautious commercial terms, the unexpected can still happen, and it pays to be vigilant.

Warning signs:

  • Your contracting party not paying its other contractors, subcontractors and suppliers either in a timely manner or at all.
  • Fast staff turnover.
  • Under-resourcing.
  • Late commitments to key supply contracts.
  • Removal of scaffolding or materials from site.
  • Slow progress and late delivery of materials.

What should you do if you think a party is verging on insolvency? Assuming there are no insolvency procedures in train, you can consider various options:

  • Avoid giving a party an excuse not to pay or perform, follow contract procedures scrupulously.
  • Monitor payments based on valuations carefully to ensure they are as accurate as possible.
  • If the debt is undisputed consider a statutory demand accompanied by the threat of a winding up petition.
  • If you have rights of deduction against payments due, e.g. for liquidated damages, think carefully about exercising them straightaway, be careful about delaying using them.
  • Dig out your contract and check what termination rights exist - are these based on breach of contract/non payment or just formal insolvency, and if the latter what stage does the insolvency procedure need to have reached before the right of termination arises?
  • Does any party have "step in rights" in relation to the contract, do you need to give them notice before exercising any termination rights, and may they step in to perform any outstanding obligations and pay any sums due?
  • Are there retention of title provisions in relation to any goods and materials which form the subject matter of the contract? Consider the status of unfixed goods and materials on site.
  • If you are already owed money, should you be trying to agree a schedule of payments? Is there anything such as a moratorium in place for the company that would prevent this?
  • Where a paying company is on the brink of failure, in accepting payment consider any possible steps to avoid this being recoverable by an insolvency practitioner as an unlawful preference.
  • Review your contract to ascertain whether you can respond to non performance by not performing your own contractual obligations, consider exercising any statutory rights of suspension, but check the procedures carefully;
  • Are your intellectual property rights at risk? Are they conditional on payment?
  • What set off provisions exist in relation to payments you are due to make, either in your contract or under common law?
  • You may have rights against directors personally, but will these may be for the benefit of the creditors generally rather than you.
  • If a contracting party has a low margin in its contract price, it may seek to maximise its return on any variations and give careful attention to its right to pursue delay or disruption claims, making careful record keeping and project monitoring crucial.

In summary, the advice is to be vigilant and if you do have concerns, be proactive, as letting matters drift on will probably worsen your position and you may miss the chance to alleviate your position.