Problem: I run a smallish civil engineering contractor. I started up the company in 2009, although I had little choice as the company I was working for at the time ceased trading due to the credit crunch. Since then, my own company has grown organically and is now turning over around £2 million per year.
Most of our work is one-off bespoke dwellings and small residential and industrial developments. Over the last 18 months or so, there has been an increase in enquiries on larger developments, which I have declined to price, partly due to lacking the management resources, and partly to do with the high risk.
Recently however, I have been talking to a civil engineer who works as a contracts manager on a freelance basis for a large civil engineering company, and I am considering approaching him to see if he would like to work for my company, which would then give it the management resources to start looking at taking larger projects on. I am however eager to minimise the risk and wondered if you had any advice?
Response: You are very sensible in making sure that in contemplating going outside your usual market [and comfort zone], you consider the risks involved and how to minimise those risks.
Some of the risks will of course be different to the markets you currently work within, although many of the risks will be similar, but on a bigger scale, and with that in mind, the biggest risk that your company faces is its exposure to losses that are far greater in value than for your normal market. For example, an average project may generate a monthly value of perhaps £20,000 and be completed within 6 weeks, whilst valuations are agreed to be made every fortnight and payments within 7 days, so the monies at risk at any one time could be only 3 weeks’ of work / £15,000. This can be compared to working for a much more contractually experienced main contractor on a large project, where the monthly values are double with valuations every month and payment being stretched to 6 weeks, meaning at peak, the risk could be £100,000.
So how do you go about minimising your risk? The following bullet-points are not only relevant to your business, but will be also relevant to any business at any time:
- Make sure that you have strong terms and conditions which ideally should be drafted by a solicitor. Engaging a solicitor to draft bespoke terms and conditions will [initially] be an expensive exercise, but it will be a worthwhile investment that will reap rewards in the future.
- If you are unable to use your own terms and conditions on any project (maybe because the sub-contract T&C’s needs to reflect the main contract’s T&C’s), then make sure that the contract is read by a solicitor prior to entering into the contract or starting on site.
- Have favourable valuations (i.e. every fortnight) with speedy final payment dates (i.e. 7 days from when payment becomes due).
- Keep delay damages to a minimum and if possible, cap the total damages.
- Negotiate a nil retention, or offer an incentive (like a discount), to reduce/eliminate the retention.
- With every new client, run a credit search – and do this on every client on a regular basis, as trading conditions change.
- Any client with a poor credit rating (or reputation), either decline the work or seek better payment periods / have the monies paid into an escrow account.
- Make sure that you keep good records when on site and ensure all variations / instructions are in writing. I wish you all the best for the future.
© Michael Gerard 2019
The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.