21-08-2024
When procuring a construction contract, the first process when considering a contractor or sub-contractor is due diligence.
On a daily basis when dealing with dispute enquiries, time after time we see problems from the very start as we explore the identity and status of the parties for legal proceedings, conflicts of interest, creditworthiness and solvency.
The questions to ask and it seems are very simple but in many cases parties get it wrong are:
- Who are you contracting with legally?
- Is there a conflict of interest?
- What is their financial track record / Credit Reference?
- What work references are there and and what work have they completed?
- Are they solvent enough to contract and how is that defined exactly?
1. Who are you contracting with legally?
It sounds very simple, but if you do not get this right it can cause big legal headache. You need to look up the existence of the contractor you are dealing with on Companies House and confirm who, where and what? Limited Company, Off shore Company, self employed, none of the above! Take care to identify the firm’s number also the name…is it D Odgey Ltd, D Odgey (Contractors) Ltd, etc. The same people may have more than one firm with similar names and one may be valueless or dormant, don’t get caught out! When it comes to legal proceedings you may be dodged! It may take a court case and considerable costs to establish the retrospective party identity. If you adjudicate, most good adjudicator’s will not take the case on, however if the adjudication proceeds and you win you could get to enforcement having spent £30,000 to btain a judgement where the wrong party has been sued and in effect you lose.
2. Is there a conflict of interest?
There should be no connection between all those involved, the professional team and the contractor nor other shareholders in you organisation and the contractors. Avoid family and friends connections. It can all lead to corrupt or unfair decisions where money is paid out. We have seen situations where the main shareholder director in a client organistion and the contractor is the same person and the other shareholders get fleeced. We have also seen contract administrators who are friends with contractors getting them work, which leads to decisions that are wrong and the client gets fleeced. A background check on all involved is required.
3. What is their financial track record / credit reference?
A credit reference check is not set in stone, but you can find out what the marketplace thinks of the contractor’s business behaviour and what they are worth. You will see if they have court judgements and what their assets are. You will also be able to see who the shareholders and directors are and how they behave. You will discover if individuals have been associated with bankruptcy in previous firms or bankrupt personally. There are serial fraudsters out there. You will also see how long the firm has been trading and if there are new firms set up recently with similar names suggesting “phoenix trading”, where firms close on Friday and start again on Monday with a different name, winding up the old firm avoiding all debts for goods and services taken illicitly.
4. What work references are there and what work have they completed?
Very simple to do. Ask about what the contractor has achieved, ask the previous employers and go and see the quality of work done. Also look at the resources and team of people they have will they do a good job or scrimp, not perform or leave a mess? An OCD approach to quality and accuracy, the devil’s detail is essential to delivering even the most simple or straightforward construction project.
5. Are they solvent enough to contract and how is that defined exactly?
When you have done all of the above, especially the credit referencing, you wil get a picture of whether or not the contractor you are engaging will go bust. The laws of the jungle here are if they go bust you lose everything you have paid out for. Nobody cares they get away with it every time and there is nothing anyone including us can do. You may even get sued by the receivers! Insolvency is a risk on every project, look for phoenix companies, avoid up front payments, avoid materials on or offsite payments if unnecessarily significant and do not overpay. Overpayment can be made unwittlingly through front loaded contract payment schedules. When the project is half complete the Contractor abandons the works enriched with £250K and declares bankruptcy no chance of money recovery.
As experts in dispute management, we have a deep understanding of the pitfalls that cause disputes and thus we are best placed advise on the impact of documents required, personalities/behaviours, adverse processes and guidance on what is being done incorrectly or wrong. Even if you are taking advice from designers, engineers or lawyers at the outset it may not be enough. If yo do not consider carefully what you are doing at the start and reduce the risk of dispute it can all go horribly wrong.
Protect your interests with a review from the Arbicon team before you start.
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