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Managing insolvency risk in construction

December 2016 - Issue 88

Insolvency of any party on a construction project potentially compromises the successful completion of the project.

See below a non-exhaustive list of actions to consider when seeking to minimise the impact of insolvency on construction projects.

1 - Performance security

2 - No further payments on insolvency clause:

by providing in the contract for no further payment on insolvency until the works are complete, it allows the employer to complete the work required, with the debt that is incurred to the new contractor being paid or offset against sums owed to the insolvent contractor.

3 - Direct payment clause:

this allows payment to bypass the main contractor and go directly to the subcontractor, removing the risk of the contractor becoming insolvent. This type of clause is not often used due to other risks associated with it (for example, if the subcontractor is paid directly this may not discharge the obligation to pay the insolvent contractor).

4 - Price neutrality:

materials are often paid for up front. However, if you believe there is a risk of a supplier falling insolvent then only those items the contractor owns should be paid for.

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