Blog 045 - 5 Steps to Solvency

Insolvency in the construction industry is not just a risk; it's a persistent challenge, consistently making our sector the worst affected in England and Wales, accounting for a staggering 17% of all business failures. We, the Specialist Trade Contractors, the backbone of the UK Construction Sector, are often operating on kinife edge margins (around 5 to 6% profit after overheads) and are the first to feel the pinch when the Tier 1s start to squeeze.

If we are to remain capitalised and profitable during these rocky times, we must stick rigidly to the fundamentals. Here are 5 key points to prevent your business from becoming another statistic:

1. Cash Flow is Critical

Cash flow difficulties represent the primary trigger for construction insolvencies; many profitable businesses go bust due to running out of cash. Late payment is endemic, and squeezing payment terms or giving rebates seriously risks the liquidity of the specialist contracting sector.

You must manage your money proactively. Never wait for your money; you need to take ownership over ensuring you get paid promptly. This means ensuring you submit payment applications that are sufficiently clear and unambiguous, even if not technically perfect. The statutory payment regime prioritises clarity and cash flow over technicalities. Furthermore, when submitting your interim valuation, include an Estimated Final Account. This helps your client budget and increases your likelihood of payment for changes, giving you the high ground if a valuation dispute arises later. Lastly, always be aware of your client's financial year end dates, as they often pressure trades for output and then delay that month's payment to report a high cash surplus, a double negative to the specialist.

2. Negotiate Contracts That Protect You Both

Many business difficulties result from contractors accepting contracts with inadequate margins or unfavourable risk allocation. We are seeing a craze for including excessive risk transfer clauses, often via "All Risk Lump Sum" agreements, designed to pass all the risk down to you, the Specialist Contractor.

To survive, you must agree on contracts that distribute risk fairly. Probably the most important takeaway here is to set a maximum cap on your liability for Damages, liquidated (LDs) or general (GDs). Aim to cap your liability, perhaps around 5% of the original contract value, which roughly aligns with the average operating profit. While you're at it, negotiate yourself a brief 'holiday' from the application of damages, a period after completion during which you are exempt from paying charges. Remember, a contract should work for both parties.

3. Demand Detailed Scopes and Attendances

A detailed scope document leads to a smaller variation account. As the true expert, the Specialist Contractor is uniquely positioned to identify ambiguities or omissions in the scope, whilst it shouldn’t be your responsibility, it could be your lifeline.

If you receive vague or generalised contractor’s requirements (scope / works information etc.), you must proactively read and comment on the scope until it accurately details the works. If there are details you are unsure about, request provisional sums or agree a 'rate only' at the outset to control costs later and prevent disputes about pricing. Furthermore, a clear contract must include Schedules of Attendances. If you fail to agree upfront what attendances (like scaffolding, temporary electrics, or crane access) will be provided, you risk being liable for delays that result from a loss of that service. Why not use my free download schedule of attendances as your starting point – find it in the downloads section of my website.  

4. Keep Meticulous Records

When issues like delay or cost overruns occur, Specialist Contractors can often find themselves facing unfair criticism from the Main Contractor/Developer. The fairest defence has no effect whatsoever unless you can deal in fact and provide relevant proof.

Records are the key to demonstrating what happened and are often worth their weight in gold when needed. Failure to track and substantiate claims for additional work or delays, result in significant revenue losses. Therefore, make keeping detailed records, site diaries, access logs, and a substantial quantity of photos your absolute minimum standard. Most importantly, ensure you formally notify your client early of potential issues that could affect your time or cost.

5. Secure Your Supply Chain (Competency Trumps Price)

The reliance on complex supply chains creates inherent vulnerabilities. Rising material cost inflation (with items like steel, timber, and cement up 15–20% since 2020) and supply chain disruption are critical factors pushing companies toward insolvency.

You are only as good as your supply chain. Engage with your suppliers to confirm maximum lead times, stock levels, and potential price increases. If you are concerned about materials shortages leading to stalled projects, approach your client about the issue and suggest a collaborative solution, such as asking them to pay for materials off site to derisk their programme and manage your cash flow. Lastly, remember the hard learned lesson: Competency trumps price. Aligning values within your supply chain is worth considerably more than the savings offered by a cheap charlatan.

These are set to be difficult times and cash in the bank is key to survival. Take the time now to prepare properly to ensure this doesn’t become a one way street of leveraged risk against your business.

If you want to discuss strengthening your contracts, managing your cash flow, or navigating these challenging times, drop me an email and let’s start a conversation