Distressed Developments: Contractor Termination, Insolvency or Exit
Construction is an industry in which some parties take on huge risks, manage complex cashflow arrangements and yet operate squeakingly-competitive profit margins. This combination means that, unfortunately, the sector has its share of projects that go wrong. Sometimes this involves a contractor exiting its role on the project through insolvency, default-based termination or sometimes even mutual agreement, at which point the Developer has the task of ensuring a clear plan for the project’s delivery is quickly established.
Here is a very brief checklist, with commentary, of the issues that the Developer might face and other factors they should bear in mind:
- Funding: The Developer should immediately check the terms of funding agreements and seek to establish communications with Funders to deliver information regarding the re-establishment of the project. Developers should consider whether they are in breach of their funding terms, and discuss with the Funder what steps will be required to secure continued borrowing on the project.
- Responsibility for the partially performed Works: The nature of the Contractor’s exit will determine the position in relation to responsibility for works that have already been performed. If the outgoing Contractor is still solvent and their exit is by mutual agreement, the terms of that exit should deal with responsibility for the design and workmanship of the project as delivered to that point.
- Role of replacement Contractor: When obtaining a replacement Contractor it is important to fully understand what responsibilities they are willing to take on, including responsibility for management of costs of completion. With sufficient information regarding the works performed to date, a replacement Contractor may be willing to adopt the partially performed works and to take responsibility for work already performed, for a price.
- Relationship with Sub-Contractors: It may be that important sub-contractors had provided the Developer with Collateral Warranties containing a step-in provision. This might assist a Developer maintaining continuity among major sub-contractors – surely a great help to getting the project back on track. Bear in mind, though, that particularly in insolvency cases sub-contractors may not have been paid and some diplomacy and advance payments may be required to obtain their co-operation.
There will always be a huge number of project specific factors to consider in a short space of time in a distress scenario. Our Real Estate and Development Team provides multi-specialism advice to ensure all aspects of a Development reconfiguration are dealt with in a co-ordinated way.
While the overall profitability of a project will often be adversely affected, in our experience it is possible to limit the practical and financial damage caused by an unexpected distressed Development scenario if action is taken swiftly and expertly.