Build or bust

Despite the appalling economy, many schools are undertaking building works. John Cahill urges those schools to work with their main contractor to ensure that the project does not hit the financial buffers mid-project

The UK is having a wake-up call to an economy based on debt – and the construction industry is in the forefront of that experience. Starting with big contractors, universally known as main contractors, it is always worth the expense of having your auditors visit the company’s offices and ask for a completely open book inspection of the company accounts. Giving them 24 hours’ notice of such an inspection concentrates the mind wonderfully. A performance bond for, say, 10 per cent of the contract value is useful, not necessarily for the ability to cash it in (to do that you have to persuade the banks to release the money), but to see the value of the quotation of the bond itself.

Share around
On the whole, main contractors subcontract almost all the work that is done onsite. There is a system of having your favourite or preferred subcontractors become one (your school heating company that has served you faithfully for 30 years, for instance) and that is known as “nomination”, but it places an onus on you of the financial liability and performance of that company. In the current marketplace, you should avoid this. Therefore, all subcontractors should be what is known as “domestic”, to come under the responsibility of the main contractor. This means that when one of them goes belly up, in theory it shouldn’t be your problem, but I am afraid it is. Here are some ground rules to adopt to mitigate the effect of any insolvency, no matter how big or small, on your projects.

Consider your alternatives
Always have a Plan B. Never announce an opening date for the new building. The school looks foolish if it does not happen on time. Sometimes, this carries additional expense such as the hire of temporary classrooms and, to a certain extent, that can be protected by contract damages, but they are always difficult to execute, so you should always budget for a significant overrun, even if it never happens.

Do not exert legal or financial pressure on the contractor to achieve something that is probably impossible. It might work in the City on multimillion-pound deals, but it won’t work on a small contractor, with a turnover of £1 million and a profit of £10,000. All you will do is make them worry and possibly push them into bankruptcy.

Even if the problem is “domestic”, ensure you and your consulting team understand what the true problem is for the contractor. He will have tried not to work with somebody who has financial difficulties, but it does happen, and if he feels that you intend to help him, you will get more out of the process while he finds a new subcontractor.

The law is an ass
The law is never the answer: it only understands the intellectual discussion of forms of contract and whether things happened or not, who was liable etc, but the interwoven mesh of relationships, procurement and the quality of personnel involved is never appreciated. Of course, for a major dispute of six figures this might be appropriate, but on the whole avoid this route.

So, if it happens, and the joinery subcontractor goes bust the day he is due to start onsite, sit down with the contractor and work out what it actually means. You may have a “liquidated and ascertained damages clause” for £5,000 a week, which is going to give you £30,000 for a six-week delay, but that might be a sum of money that might make the main contractor also vulnerable to bankruptcy. What does it really mean to you? And, if you can get the contractor to understand that you are willing to share his problem, then you will get his undivided attention to resolving it.

For my entire career, I have had to do the work first and then I get paid. Every now and again somebody decides not to pay a bill; we never work for them again. In education, however, you get paid in advance, regardless of whether young Charlie gets an A* or a D.

John Cahill is managing director of Barnsley Hewett and Mallinson.

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