Damage limitation and contractor collapse

In the current climate, any time taken to get a true picture of your clients and supply chain will not be wasted. It is essential to have a real-time appreciation of the strength of the financial covenant of your client or of your subcontractors.

Last year's financial information will now be all but meaningless in the face of such a fast-changing business environment. Gaining a firm's true trading snapshot can be difficult, but businesses in trouble often exhibit some warning signs once a contract is underway.

Counterparty risk

Tell-tale signs of business distress include slowing down of subcontractor work on site or a deterioration in quality.

Pressing requests for more frequent interim payments or delays in obtaining performance bonds or warranties is also an indication that things are not all as they appear. It is also worth keeping your eyes peeled for unusual visitors to site, they may just be from banks or insolvency advisors.

Estimation and tendering

Materials prices are volatile, albeit easing, but skilled labour continues to be tight with the added uncertainty accruing from a probable net migratory outflow from the UK back to Eastern Europe.

Estimation and pricing has to be subject to robust management oversight. Optimism on direct costs has to be guarded against as does less than full recovery of indirect costs justified by short term expediency.

Adequacy of resource

In difficult times, managers obviously tighten up their businesses. All costs come under scrutiny, people and departments go or are scaled back. But in the haste to cut overheads it is essential to guard against decisions that could prove disastrous further down the line.

Is there adequate internal surveying resource to ensure that valuations are up-to-date, and in sufficient detail, that valuation gaps are confronted and resolved, rather than being allowed to snowball, ultimately proving hard to recover, becoming the subject of horse trading or a buy-off against encouragement of future activity? A good reporting system should identify how and where it does go wrong and feed back into the estimations and control loop.

Site controls

Effective site control is absolutely pivotal and the site agent has to own costs on site. Work must be recorded properly, store requisitions need to be subject of formal recording and matching to the job, and plant utilisation has to be tight.

The centre and the site agent need to understand the contract - what is in the price and what is out?

Any and all variations need to be acknowledged, communicated to the centre and properly recorded at the time. If not, they can amount to a substantial additional cost as detail is inevitably lost along the way along with the organisation's recall as to what has happened on site.

Beware of acquiescence in informal promises for quid pro quo on subsequent phases or over accommodation of the client's contracts manager - he or circumstances have a habit of changing.

Managing work in progress

Never has effective cash flow management been so vital. Credit has tightened across the chain and banks are less likely to support miscalculations or react well to surprises.

Think hard before buying in ahead of time in the contract schedule. You may not get a measurement on the materials and tooling that you have paid for and the bank's funding formula is unlikely to allow for funding against unmeasured activity.

Ensure valuation deadlines are met, payments are properly followed up on and sufficient resource is allocated to ensure final accounts are promptly submitted.

Make sure you know when retentions are due. The subcontractor has to be aware of when the main contractor goes off site or at least have a diary system that prompts follow-ups on certain anniversaries.

Build in quality

The benefits of a zero defect philosophy can be substantial. Pay sufficient attention to detail to get it right first time and reduce the requirement to be called back on site for remedial work. When it is required, ensure defects are dealt with expeditiously and evidenced as such.

Andrew Stoneman is managing partner at Menzies Corporate Restructuring. Contact: astoneman@mcr.uk.com

Protect your business

• Seek professional help to credit check prospective employers or subcontractors
• Review your own risk management and control systems
• Advise on effective working capital management
• Protect your credibility with key stakeholders, including the bank - identify practical remedies and options if things are going off the rails