When one of your subbies goes bust, it doesn't make sense to kick them while they're down.
Panic and a defensive stance may seem the obvious response to a subcontractor in difficulties. You could be well within your rights to give notice, determine the contract, impound equipment, slap on security and start sharpening pencils for that claim.

But construction managers who've had their projects disrupted by faltering subbies say it's sometimes better to prop them up.

Don't get heavy
Receivers don't have much to offer from a construction manager's point of view. Their duty is to the creditor, not the client. But managers we asked recommended a friendly approach when a subcontractor goes bust.

Kevin O'Driscoll, construction manager for Try Construction, recalls an M&E subcontractor running into trouble over halfway through a £10m school extension. His company took on the labour and some management on short-term contracts to get the job finished. Casting about for another subcontractor would have added a month to the project. In the end, it finished only a day late.

Stephen Jenneson, construction director at North Yorkshire's Harrison Construction, also found it better to help an embattled subbie.

The grapevine tells all, and in 2001, in the middle of a 22-week, 103-bed hotel project, he got wind that his M&E contractor was going to the wall. Suppliers were complaining of bouncing cheques and the component supply was in danger of drying up.

"There's no such thing as a secret in this industry," he says. "People were ringing me up. I knew more than he did. So I asked for a meeting and he was truthful."

The contractor had been sold to a larger company and Jenneson's contact, who had been one of the proprietors before the sale, found himself in charge of a failing concern.

"The poor kid had been left to fry and I felt sorry for him. He'd worked up from an apprentice with that company, and he employed people he'd gone to school with. He didn't want to let it go."

Jenneson told him to write down all his liabilities. Then he went to his board and the client with the problem - and his solution. The M&E contractor had finished about 45% of the contract. To ditch him and find another would add up to eight weeks to the project. It was design and build, for one thing, and the subcontractor would have walked away with the designs. He had also set up long lead-in items such as air conditioning plant.

The board agreed to prop up the subbie for as long as possible. Jenneson called a meeting with suppliers on site and explained the situation. Then he made out cheques directly to them, which guaranteed the flow of supplies. He kept doing that every 30 days.

Most businesses that go bust are very good at construction

Nick Hood, Receiver

He gave support in other ways too. A team of labourers had no accommodation, no food and were already owed a month's wages. Hang on, thought Jenneson, this is a hotel, isn't it? He talked to the client, who agreed to let the workers use rooms already completed. They were fed as well. It may have tipped the balance in their decision to stay even though they had no guarantee on their pay.

Wider pressures finally brought the contractor down just short of completion, but Jenneson still managed to squeeze out over 90% of the value of the contract by supporting him. Jenneson said he could have made short-term money by giving notice and determining the contract, but that would have been cutting his nose off to spite his face.

"We don't work in the tender market," he said. "If we did, and were looking at a margin of 1% or 1.5% then maybe it would be different. But we're a regional, family-owned company. We have a reputation to build on. On that hotel job 93 rooms were booked for the appointed end date. We completed on time."

An ounce of prevention
Graeme Connal, surveying manager for Wates Construction, says contractors themselves can be part of the problem when they load subcontractors with too much work.

Connal's personal rule of thumb is to makes sure the work his company awards a subcontractor doesn't exceed 30% of the subbie's total turnover.

"Say you have a ground works contractor. He does a good job, so your natural instinct is to give him another job, and another, and so on until he lets you down because he doesn't have the credit, the resources or the management to handle all the jobs."

Connal subscribes to global credit reference agency Experian for online information about companies, limited or otherwise.

"It's all about good supply chain management," he explains. "If one link in the supply chain breaks, it affects all of us. Wates' policy is to ensure all subcontractors are paid on time and in accordance with their terms and conditions."

Flog it fast
Selling the company as a going concern is often the quickest and cleanest way for a receiver to discharge their duties to the bank. Often the operational managers are heavily courted because they know most about the business, in particular whether it's viable.

Depressing regularity

Nick Hood (pictured here), of insolvency firm Begbies Traynor, is the appointed receiver for cladding specialist Telling UK, which went into receivership in May, leaving up to 60 live contracts dangling around the UK. He sees subcontractors go under with depressing regularity. “In almost every case, the managers are very good at construction,” he says. “They are experienced, wise and worldly. But there is never any decent financial management. I can count on the fingers of one hand the instances where there was even adequate financial management and control.” He says firms that go bust are typically poor at capturing costs, getting quotes right and settling final accounts. The quoting process tends to be just too informal, which plays into the hands of larger contractors. “It’s very nearly ‘Oh, you know what it is we want,’ and then the subcontractor isn’t strong enough in the final negotiations.” On the brighter side, Hood says boards are calling in outside assistance earlier than they used to. It used to be that one in six businesses went into formal insolvency. Now, he says, because recovery specialists are being asked to help sooner when trouble first appears, that ratio has improved to one in 31. In Telling’s case, says Hood, it was a classic tale of the parent company taking its eye off the ball. The group acquired two new businesses and developed a major Caribbean business. When problems started developing at one of its three regional offices in the UK, senior management was too stretched to spot it early enough and act. Hood was appointed receiver in May. At the time there were 120 contracts extant around the UK, half of them live. His job is to extract as much value as possible out of Telling UK for its creditors and that means selling it as a going concern if possible. “The key is in the contract book,” he says. “The first priority is to prevent all the value from disappearing overnight. We have to minimise disruption to the ongoing work and not upset the contractors unnecessarily.” This stage can be tricky. Both contractor and receiver want to come out on top, and each party has its own agenda. A cladding subcontractor like Telling will likely have some design input to the project. It’s often a question of “systems” rather than, say, tiles. The contractor needs the subbie’s knowledge to finish the job on time. On the other hand, the work may be largely finished and the contractor is holding retentions. It’s up to the receiver, or its appointed surveyors, to manage the snagging and settle the final account. “I’ve never yet seen a contract dispute where everything is written down,” says Hood. “And as time goes on and people drift away, it gets harder to gather oral evidence.” That’s why Hood often turns to insolvency quantity surveyor Naismiths, which has relationships with big contractors and is therefore more likely to get a reasonable hearing when they come knocking.

Source

Construction Manager