Building firms told to ask for financial guarantees

Deputy Business Editor

Monday 24 September 2012

SMALL Scottish construction firms are being urged to ask for stronger guarantees when taking on projects in order to better protect their cash flow and guard against insolvency.

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GREIG CAMERON

Frazer Wardhaugh, partner and construction law specialist at HBJ Gateley in Glasgow, believes many SMEs could better protect themselves by taking defensive measures prior to any work starting. He suggests contractors and sub-contractors can demand greater security from clients and main contractors further up the supply chain.

Options to make sure SMEs get paid include using bonds to provide access to funds from a financial organisation or implementing a parent company guarantee to make sure performance of a subsidiary is covered by the business which owns it.Another possibility is funds being held in escrow, or project bank accounts where the fees are ringfenced specifically to pay contractors.Mr Wardhaugh said: "There are very few construction firms which go bust because they're bad businesses, they go bust because they run out of cash. "When a project runs into trouble the first thing that tends to happen is that the various businesses in the contractual chain seek to protect their own position by holding onto their cash for as long as possible – by fair means or foul. This is particularly harmful to SMEs who may not be able to afford to bump along with no money coming in."Even now, when the sector has experienced several years of severe difficulties, anecdotal evidence suggests that it appears common for contractors not to ask their clients up the chain for some kind of financial security."This is a tough sector to be in at the moment and being able to achieve even a little more certainty over cashflow can give construction companies the competitive edge."Mr Wardhaugh also suggested exploring alternative funding arrangements.Bibby Financial Services, an invoice finance specialist, has developed a product tailored for the construction sector.Gary Mavor of Bibby said: "Contractors and sub-contractors often have to work under a variety of industry contracts and securing payment for work completed can be difficult and downright complicated. This can take up significant amount of management time and cost which could be better used driving their business forward."It is estimated there have been 5000 insolvencies in the UK construction sector in the past two years. Figures from Experian showed 293 building and construction insolvencies in August this year, which was a larger number than any other business sector.

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Building firms told to ask for financial guarantees

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