Can we learn sufficient lessons from Carillion to avoid construction related insolvency closer to home?
PUTTING INSOLVENCY ON THE AGENDA
The fallout from the collapse of Carillion, the diversified construction firm, continues to be felt here in Ireland.
Despite assurance from the government that the direct impact on the public purse is minimal, the reality is that insolvency in the construction industry has a much wider impact than that immediately felt and the Carillion story is a timely reminder that even in "good times", solvency should be top of the agenda for all stakeholders in a construction project.
PROCURING THE PROJECT
Any discussion of Carillion ultimately returns to the same question how could a firm with so many high profile "lucrative" contracts, collapse so spectacularly? Surely in Ireland, where our fragile construction industry is only just recovering from its own lost decade, such doom and gloom is behind us?
The reality is, the rising market has not lifted all boats. Outside Dublin, recovery remains slow with competition for work fierce. Even within Dublin, procurement strategies often mean that behind a marquee prime development may lie a contractor working to very tight margins and limited cash flow. While fixed price contracts, particularly when priced low, can be very attractive to an employer from a cost certainty perspective, it may not be an appropriate method of procuring a particular project and placing tight parameters on a contractor in a competitive tendering process can result in cost overruns and significant claims or cash flow issues.
MANAGING CASH FLOW & PAYMENTS
Care also needs to be taken to ensure that risks (including cash flow) sit with the party best placed to manage them. Similarly when bidding for work, contractors and subcontractors need to bid sensibly to avoid commencing work on a project for a price at which it cannot be completed.
The requirements of the Construction Contracts Act 2013 can, if not managed at main contract level, tighten the noose on already stretched contractors. A contractor should aim to secure appropriate payment terms which do not leave him effectively financing a project.
DO YOUR DILIGENCE
Regardless of the role a party is taking on a project, the robustness of the contractor/employer and its ability to resource the project is paramount and due diligence should always be carried out before entering into a contract or commencing works. While certain forms of performance security can...