07 Apr

How Builders and Subcontractors Can Minimise Risk

construction_blog_620With reference to Anne Gibson’s’ article in the NZ Herald (April 3: ) titled “’Most Dangerous Time’ in Construction Cycle: Warning”, the article contains a summary section titled “How Builders and subcontractors can minimise risk.”

I find this section quite interesting and pertinent, although the source (Staples Rodway) do overlook one of the most important aspects when it comes to minimising risk and avoiding loss– the credit qualification of the contractor at the outset, and their on-going credit behaviour during the course of the relationship.

While understanding the Construction Contracts Act, getting variations approved in writing, and seeking Terms of Trade advice are all good ‘strengthening’ measures, none of them are going to assist the builder or sub-contractor, if the main contractor becomes insolvent and goes into liquidation during the course of the relationship?

Some aspects are fine in theory but not practical in real situations. For example, building contractors do not give Personal Guarantees to sub-contractors, and stopping work without just cause is not seen by the subbie as an option, in the event they want to continue to earn a living from their only source of revenue. Similarly, quoting with plenty of margin, won’t win the job in the first place!

The real protection comes from firstly understanding the risks when entering into the relationship – in particular, does the contractor have a good history and a renowned reputation for paying sub-contractors and builders when due? Do they have a good cash flow, and the capacity (and / or will) to pay on time?

And subsequently, watching and monitoring the contractors credit behaviour throughout the term of the contract, will ensure they are able to act early in the event of cracks appearing.

Prevention is better than cure, and we at CreditWorks – based on the above preventative measures, and supported by over $1.7B of up to date financial data and payment profiles – prefer the ‘fence at the top of the cliff approach’ rather than waiting for the ambulance to arrive at the bottom as unfortunately, by this stage the patient is terminal, and no amount of remedial resuscitation is going to breathe it back into life.

About the Author

Alan Johnston
Alan heads up the Information bureau side of the business (CRISworks) as well as providing credit expertise and consultancy to clients in the areas of Credit Management best practices, credit training, Credit Terms of Trade reviews, PPSR education, and pretty much all other credit requirements of clients in need.

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