One year after the collapse of Carillion, two large companies at the heart of the UK’s construction industry and infrastructure are making the headlines. Kier and Interserve are both beset by spiralling debts and major financial problems.
Interserve’s pre-pack administration deal was confirmed on Friday, which hands ownership of the company to its lenders. Kier has been very publicly struggling with debt refinancing since last year, and has this week announced a pre-tax loss of £35.5m for the second half of 2018. Its construction arm is still in profit, but heavy losses have been recorded on developments and housing.
Carillion and Interserve are exceptional cases to look at, due to the sheer scale and diversity of their operations. Usually, administration is announced at the point when work on construction projects stops, even if there is a chance of recommencement in the future.
"It is very rare for administrators to trade a construction business while trying to find a buyer," observes Lee Causer, Business Restructuring Partner at BDO.
However, such headlines should give practices cause to consider their own risks and liabilities in terms of clients. What can architects do when faced with a client heading for administration or, even worse, compulsory liquidation?
Causer points out that it is standard behaviour for customers to terminate contracts in the event of an insolvency. There are likely to be concerns over the availability of skills and personnel for future remedial action that may be required on a project.
If an insolvency is declared then architects, along with all other suppliers, will normally be classed as ‘unsecured creditors’. Unfortunately, they will fall below any secured charge holders such as banks, the fees and expenses of the insolvency process, and preferential creditors (including direct employees) when it comes to payments.
All unsecured creditors are regarded as equal and in many cases will receive nothing at all or a few pence in the pound of money owed.
Of course, architects should ideally begin any project with fully documented letters of instruction, clearly outlining the requirements of the role, invoicing frequency, and payment terms.
The contract should have been negotiated with staged payments at pre-determined milestones. Frequent and immediate invoicing, as contractually allowed, should follow.
RIBA legal adviser Robert Stevenson points out that architects may have leverage they can exploit that will help to bring them to the top of the invoice pile.
Under RIBA Standard Conditions of Appointment (clause 8.2.2), an architect can immediately terminate work in any case of client bankruptcy, administration, liquidation, or a company voluntary arrangement (CVA) with creditors.
In the case of a default over fees, the architect also has the option (clause 6.3.2) of suspending the licence to use any ‘material’ they have produced for a project, such as models, drawings, videos or similar, after seven days’ notice.
The Construction Act, which covers anything classed as a ‘construction contract’, gives suppliers the right to give seven days’ notice of stopping work if there is an unacceptable delay in payment of invoices.
As a general rule, even liquidation does not automatically terminate contracts or excuse contractors from working, but most contracts will include both parties’ right to terminate in circumstances of insolvency.
Causer says termination has to be a judgement call based on how crucial you or your drawings really are to any project that an administrator might wish to see continue.
"You have to be aware that there will always be someone else willing to do the work, and the client may simply say: 'OK, we’ll use someone else'," Causer warns.
"If there is still a platform to generate some future revenue by being supportive, it is generally a good idea to support the administrator and/or Newco (the new venture emerging from administration process) and still receive some money, rather than place at jeopardy future income due to the anger caused at having an outstanding creditor balance."
From his business recovery perspective, Causer says supplier termination notices and licence withdrawals are rarely seen in practice.
"Contracts are almost always terminated by the client or administrator, not the supplier. Suppliers should receive documentation from the appointed administrator telling people not to do any further work without the administrators’ approval. Without that approval, suppliers will not have the undertaking to be paid for it."
The best course of action in times of market stress, of course, is to be forewarned. Causer says architects should keep up to date with situations that are developing, even if this is only from information available in the public domain.
Suppliers should always satisfy themselves that a client is robust enough prior to starting work, something which becomes all the more important if you do a lot of work for one client.
"Once started, even the smallest practice needs to major in good housekeeping, in terms of contract administration and monitoring," Causer advises. "It is often too easy to ignore a situation and concentrate on the job. But in times of crisis, good housekeeping will always make problems easier to deal with."
Thanks to Lee Causer, Partner – Business Restructuring, BDO; Robert Stevenson, Partner, BLM.
Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas
