Five ways to spot a sinking ship

So it wasn't a swivel chair after all.

Last month, Building erroneously reported that said item of furniture had been taken home by one of the directors of the London-based roofing contractor Coverite less than a week before it went bust. In fact, it was a leather settee.

Staff had been gossiping for about a month that the firm might be in trouble, but the directors would not admit the extent of their financial woes (5 May, page 22). In retrospect, the director's desire to get his sofa away from the office was a signal to staff that all was not well.

Going bust is not uncommon in construction. Delays in payments and poorly priced contracts mean contractors, not usually asset-rich companies, often run out of cash. So, unless they have a generous, highly trusting bank, firms find their credit is no longer good.

There are many ways of working out if a company is in trouble. Individually they might mean little, but if more than one tell-tale sign appears over a short period, it might be time to dust off your CV.

1. The subbies get nasty

The one ever-present clue that a contractor is going into administration is that lower-level creditors - subcontractors rather than banks - will be stretched. They will be paid a lot later than usual and they might just start to show their displeasure.

This can manifest itself in several ways. The most obvious signal is if the subbies down tools. During the downfall of contractor Ballast, for example, glazing firm Albann pulled its workers off the East Lothian PFI schools project, dismayed at payment delays.

However, this is likely to be a subbie's last resort, so there should be earlier warnings.

A senior industry figure who has been involved at three companies in financial difficulties - one of which went bust - says: "In each case, subcontractors started giving our site managers hell."

Interestingly, the source adds that even when they were being screamed at, these site managers rarely asked management what was happening. When they did, he says, the situation was explained, but by this stage it might have been too late to find another job before the inevitable redundancies kicked in. The top tip is to voice concerns to the boss straightaway.

2. The QS is stressed

A dying company needs every penny it can get hold of. Suddenly, the on-site QS is getting calls on his mobile every five minutes, as management orders him or her to rake in whatever they can. "It's a last-minute panic," says Lee Manning, a partner at financial consultant Deloitte & Touche. "They will want the QS to get the valuations for the work they've done and sign them off quickly so they can chase the client for the cash."

Subcontractors were in the offices of their bosses for hours at a time and left either looking grumpy, or clasping an envelope containing a cheque

Manning says this has happened at almost every construction firm administration he has been involved in. Richard Steer, senior partner at QS Gleeds, agrees. He also feels there is "a hardening up of attitude". By this, he means the contractor has resorted to getting its lawyers to check contractual rights with clients. The lawyers, in turn, demand more documentation from the QS on each of their valuations to ensure every penny is squeezed out of the client.

3. Management is always in meetings

If a firm is on the verge of collapse, it can be taken for granted that management will be booking meeting rooms at a moment's notice. Often, the personal assistants or receptionists will be the first to realise something is amiss from the frenzy of activity.

At Coverite, the Speroni family, who ran the company, were meeting unusually often. A source close to the company says the family was pumping "substantial sums" of money into the company as late as March - only a month before the administrators were called in. They were convinced the company could still be saved and that clients would pay monies owed on their contracts. More and more meetings were held as they sought ways of recovering the cash, but the fact was several contracts had been priced too low, meaning the company could not carry on.

Likewise, management at fit-out firm Curzon Interiors was holding a series of panicked meetings the week before it went into administration earlier this year. They were desperately trying to get the company's bondsman to provide a £2m guarantee to the bank while it restructured its finances. The bondsman pulled out at the last minute. Staff also noticed that subcontractors were in the offices of their bosses for hours at a time and left either looking grumpy, or clasping an envelope containing a cheque.

4. Local firms steer clear

If you have any doubts about the solvency of your employer, or a company you are considering joining, it is a good idea to ask around for local firms' views. A case in point is Scottish contractor Peter Walker, which went under with 344 redundancies in April.

At least one subbie smelt a rat when his firm considered working for Peter Walker. Kenny Waters, a director at VB Contracts, found he could not get credit insurance if he took up the contractor's offer. If a contractor is in a strong financial position, a credit insurer would guarantee paying a subbie's costs on a project up to an agreed amount should that company fail to pay up. Clearly, though, Peter Walker had not convinced the insurer that it was a safe bet.

"We could have taken the risk and worked for them without insurance," says Waters. Sensibly, he didn't.

5. The parent loses interest

The decision of the parent company to sell can be a new lease of life for a company - or it can be a death knell. Doug Barratt was a director at Ballast in September 2003 when the board was told one evening by its Dutch parent, Ballast Nedam, that it was going to sell its UK subsidiary. He says: "There was no potential for Ballast to go into administration until then. It was sudden death."

Barratt argues that it then became difficult for Ballast to win new work. After all, there was little reason for potential clients to believe it was a sound business if Ballast Nedam did not. This soon led to suppliers and subcontractors demanding their fees earlier as they knew Ballast was in freefall, draining yet more cash.

A month later, Ballast Nedam decided the potentially long sale process was not worth it - there was no telling when a buyer might appear and, in the mean time, the company would have to cover its subsidiary's financial haemorrhaging. It pulled the plug, forcing Ballast to call in the administrators within a week.