For those funded by the public purse, it is more important than ever to protect themselves against the potential ‘domino effect’ of contractor insolvency. In February 2022 the recorded number of administrations in the construction sector was at its highest level1 since the start of the pandemic; in total, there were 31 administrations in the construction industry, the biggest total in nearly two years.
Construction was the largest recipient by volume of applications for COVID-19 loans2 and the second largest by value. The additional loans have increased interest and debt repayments for many, adding to cash flow concerns.
Cost inflation looks set to stay as construction companies continue to grapple with the complex challenges that the UK construction market presents. Contractors are facing serious difficulties after prices of certain construction products have soared by this year and although few building products to the UK come from Russia, Ukraine or Belarus, there will knock-on effects from the conflict. There are many pressures facing the industry this year and careful monitoring and controlled pricing will be key in 2022 and beyond.
We have seen many well-known construction companies fail already in 2022, and unfortunately we may see more fall into administration in this year.
The impact on the public sector can be significant if a contractor fails midway through a construction project. The delay in service start up is one issue but potentially a greater issue is the impact on the local community from which a work force may be drawn. Unless a replacement contractor is found quickly then the economic realities of a redundant workforce can soon start to bite.
Similar issues arise when an outsourced service fails midway through a contract. Again the local community suffers but in this case the vulnerable who may rely on the services are impacted also. Arguably a worse position than failure prior to the service being started.
Financial protection against the impact of insolvency of a contract may be available through insolvency and performance bonds. However improvements in contract management as advocated in the Government’s review into the risks of fraud and corruption in local government procurement issued in June 20203 is something which is becoming increasingly relevant. Within the report 78% of respondents said they provided training in procurement but only 12% offer contract management training. Whether this has changed is unknown but if we are to avoid an ever increasing number of contract failures then management of those contacts may need improving.
Gallagher has supported many clients in the development of contract risk management strategies; an element of which should be the monitoring of a contractors financial performance. Regular monitoring of KPIs within a contract helps with the performance of that contract but it tells you little about a contractor’s overall financial performance. What would the impact of a failure of a major contract in Indonesia have on your contract?
Gallagher has access to tools to allow clients to monitor the finical stability of contractors. This combined with robust contract management training will not prevent insolvency, but allow the impact of an insolvency to be managed more effectively.
Please reach out to your Gallagher representative if you wish to discuss this topic further.