Managing financial and other risks as a Contractor

Whether you are a new contractor or have been working in the industry for some time, it is important to keep yourself informed, up to date and prepared for the various issues and risks faced in the construction industry.

As many are well aware, the long term affected of the pandemic and subsequent inflation over the costs of materials and supplies. In such an environment, it has become far riskier to conduct business in circumstances where companies are often set up with little to no assets to their name. Meaning that if something goes wrong, the ability to recover any loss and damage may be small, or non-existent.

Our building and construction team regularly assist contractors recover debts and money owing to them. There are many instances where a builder or contractor may withhold payment to a subcontactor and here is some helpful information to help you de-risk your business.

What happens to a company when it becomes insolvent?

It may be common knowledge in the industry when a company is struggling financially, or its demise may come as a complete surprise. Either way, when a company finally struggles and becomes insolvent, the company may be liquidated or put into administration, either voluntarily or by a party who may have sued them or pursued their own debts.

Once a company becomes insolvent, the company cannot control its finances as there is a specific and legal order in which any of the companies’ debts must be reached.

If you are a contractor that is owed money from a company that becomes insolvent, it is quite unlikely that you will be paid, particularly if the company has secure creditors such as banks and other finance. The order in which people are paid usually leaves contractors and other suppliers at the bottom, meaning there is rarely any money left or only small cents on the dollar.

If you are a contractor who is owed money by an insolvent company, seek advice as soon as possible about what steps you need to take.

How much do you know about the company you are contracting with?

It is always important to do some due diligence before entering into any agreement with another party, regardless of what industry you are in.

For contractors in the building industry, these few simple steps could mean the difference between financial distress and ruin for your company, or simply provide you with a heads up for being a little more cautious and restrictive with how much credit you may offer someone or how long you leave an unpaid invoice before chasing it.

Here’s a few quick steps to take to gather that information:

  1. ASIC Search – Carrying out a company search on the ASIC website only costs a small fee, however, will provide you with invaluable information about the company and its directors. When reviewing the search, you should keep an eye out for any charges from the company, any current or past proceedings issued or default judgments ordered, appointments of administrators and receivers (even if temporary), or multiple financials.
  2. License Check – Where applicable, for any licensed parties it is important to do a check with the party you are entering a contract with to ensure that the registrations with authorities such as the Victorian Building Authority or others. This will reveal details such as:
    • they are holding a current license;
    • if they have otherwise been suspended;
    • if they have received demerit points; and/or
    • have been fined or anything of that nature
    • Other Registration Checks
  3. Other Registration Checks – If the company purports to be registered with any governing body, authorities or other cohorts, it is often free to check that they are current members (not a past or falsely representing to be) and will give you peace of mind.

The above being said, it is always important to gather your own information, but you may also need to be careful about what rumors you take into account. Often other businesses or contractors will tell the industry about late payers, credit issues or business troubles – proceed with caution and make sure you protect yourself.

If you are a contractor and would like to find out more about pre-contractual due diligence steps and how you can better protect yourself – please get in touch with one of our lawyers.

If you decide to go ahead with a contract – what else can you do to protect yourself?

There are quite a few ways to go about protecting yourself and your company from any risky contracts and projects, or you may just prefer to have those protections as a standard procedure moving forward.

However, each of the protections listed below should be carefully considered as to whether they are right for you, suitable for the price and nature of the contract and if you are likely to face any push back from the other party.

If you are unable to obtain security in one way or another, this means that you will be able to attempt to recover any debt with priority over unsecured creditors.

Listed here are some of the most common types of security and protection used by contractors:

  1. Unconditional Bank Guarantee – This is where a company you contract with puts up cash that is held in a specific bank account, for an agreed sum, for your benefit should the company be unable to pay your invoices or should. This is a slightly more effective tool than a director guarantee, this is because you don’t have to chase the cash or worry that it cannot be produced by the director personally.
  2. Director Guarantee – A personal director guarantee is a way of protecting yourself if the company becomes insolvent or has significant secured creditors (such as banks and private funders). This tool can be particularly effective if the company has little to no assets, but you know that the director/s do hold private properties and other assets which you could rely on should the need arise. It means that the director is personally responsible for any debts the company incurs with you, for any specific contract for which you have obtained a director guarantee. This is a useful mechanism because it is rare that a director wants to personally have to pay you from their own pockets, and as a result are often more likely to be a financially low risk company and will pay their bills on time. A director guarantee may also incorporate the options set out below, namely a caveat or mortgage and PPSR.
  3. Secure your interests with a caveat or mortgage – If your contract has a charging or security clause, you may be able to secure any debt or money you are owed under a contract against another party’s property.
  4. Retention of titles – Check your contract before signing, some standard contracts such as HIA include a ‘retention of title clause’. This specifies that the goods and materials remain in the contractor’s ownership until full payment is made. While there are only some circumstances where a contractor or builder can return to the site and take possession of and remove those materials. Please note that it is important that you obtain advice before removing anything from the site, as wrongful removal may result in you being pursued for loss and damage to the property or site, and a variety of other claims which could be brought against you.
  5. PPSR – In limited circumstances it may be suitable to register your interests on the Personal Property Securities Register (PPSR) in accordance with the terms of your contract or as otherwise available to you. PPSR registrations are quite specific, so it is advisable that you speak to one of our lawyers regarding this.

How we can help…

At PCL Lawyers our law firm is committed to providing concise legal advice with commercial understanding.

Our lawyers have relevant building and construction experience and understand the industry, from both a specific contract and business perspective. This means we can develop strategies and quickly guide you through the different options you have available.

As a contractor, we can help you recover the fees owed to you and help you avoid situations that arise by securing your interests as much as possible.

If you require further information or assistance, please contact one of our building and construction lawyers on 1300 907 335.

Disclaimer: This article has been prepared for general information purposes and may not apply to your situation. This information should not be relied upon for legal, tax or accounting advice. Your individual circumstances will alter any legal advice given. The views expressed may not reflect the opinions, views or values ​​of PCL lawyers and belong solely to the author of the content. © PCL Lawyers Pty Ltd.

If you require legal advice specific to your situation, please speak to one of our team members today.

About The Author

Emma Restall is our lead of the Building & Construction team. After completing a…

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