Article Managing financial and other risks as a Contractor Australia Real Estate

Managing financial and other risks as a Contractor

Building contractors should be aware of ways to protect themselves or their company from risky contracts and projects.Australia

Real Estate and ConstructionWhether you are a new contractor or have been working in theindustry for some time, it is important to keep yourself informed,up to date and prepared for the various issues and risks faced inthe construction industry.As many are well aware, the long term affects of the pandemicand subsequent inflation over the costs of materials and supplies.In such an environment, it has become far riskier to conductbusiness in circumstances where companies are often set up withlittle to no assets to their name. Meaning that if something goeswrong, the ability to recover any loss and damage may be small, ornon-existent.Our building and construction team regularly assist contractorsrecover debts and money owing to them. There are many instanceswhere a builder or contractor may withhold payment to asubcontactor and here is some helpful information to help youde-risk your business.What happens to a company when it becomes insolvent?

It may be common knowledge in the industry when a company isstruggling financially, or its demise may come as a completesurprise. Either way, when a company struggles finally and itbecomes insolvent, the company may be liquidated or put intoadministration, either voluntarily or by a party who may have suedthem or pursued their own debts.Once a company becomes insolvent, the company cannot control itsfinances as there is specific and legal order in which any of thecompanies' debts must be reached.If you are a contractor that is owed money from a company thatbecomes insolvent, it is quite unlikely that you will be paid,particularly if the company has secure creditors such as banks andother finance. The order in which people are paid usually leavescontractors and other suppliers at the bottom, meaning there israrely any money left or only small cents on the dollar.If you are a contractor who is owed money by an insolventcompany, seek advice as soon as possible about what steps you needto take.How much do you know about the company you are contractingwith?

It is always important to do some due diligence before enteringinto any agreement with another party, irrespective of whatindustry you are in.For contractors in the building industry, these few simple stepscould mean the difference between financial distress and ruin foryour company, or simply provide you with a heads up for being alittle more cautious and restrictive with how much credit you mayoffer someone or how long you leave an unpaid invoice for beforechasing it.Here's a few quick steps to take to gather thatinformation:ASIC Search

- Carrying out a company search onthe ASIC website only costs a small fee, however, will provide youwith invaluable information about the company and its directors.When reviewing the search, you should keep an eye out for anycharges over the company, any current or past proceedings issued ordefault judgements ordered, appointment of administrators andreceivers (even if temporary), or multiple financial.Licence Check

- Where applicable, for anylicensed parties it is important to do a check with the party youare entering a contract with to ensure that the registrations withauthorities such as Victorian Building Authority or others. Thiswill reveal details such as:

they are holding a current licence;if they have otherwise been suspended;if they have received demerit points; and/orhave been fined or anything of that natureOther Registration Checks

Other Registration Checks

- If the companypurports to be registered with any governing bodies, authorities orother cohorts, it is often free to check that they are currentmembers (not a past or falsely representing to be) and will giveyou peace of mind.The above being said, it is always important to gather your owninformation, but you may also need to be careful about what rumoursyou take into account. Often other businesses or contractors willtell the industry about late payers, credit issues or businesstroubles - proceed with caution and make sure you protectyourself.If you are a contractor and would like to find out more aboutpre-contractual due diligence steps and how you can bettersafeguard yourself - please get in touch with one of ourlawyers.If you decide to go ahead with a contract - what else can youdo to protect yourself?

There are quite a few ways to go about protecting yourself andyour company from any risky contracts and projects, or you may justprefer to have those protections as a standard procedure movingforward.However, each of the protections listed below should becarefully considered as to whether they are right for you, suitablefor the price and nature of the contract and if you are likely toface any push back from the other parties.If you are unable to obtain security in one way or another, thismeans that you will be able to attempt to recovery any debt withpriority over unsecured creditors.Listed here are some of the most common types of security andprotection used by contractors:Unconditional Bank Guarantee

- This is where acompany you contract with puts up cash that is held in a specificbank account, for an agreed sum, for your benefit should thecompany be unable to pay your invoices or should. This is aslightly more effective tool than a director guarantee, this isbecause you do not have to chase the cash or worry that it cannotbe produced by the director personally.Director Guarantee -

A personal directorguarantee is a way of protecting yourself if the company becomesinsolvent or has significant secured creditors (such as banks andprivate funders). This tool can be particularly effective if thecompany has little to no assets, but you know that the director/sdo hold private properties and other assets which you could rely onshould the need arise. It means that the director is personallyresponsible for any debts the company incurs with you, for anyspecific contract for which you have obtained a director guarantee.This is a useful mechanism because it is rare that a director wantsto personally have to pay you from their own pockets, and as aresult are often more likely to be a financial low risk company andwill pay their bills on time. A director guarantee may alsoincorporate the options set out below, namely a caveat or mortgageand PPSR.Secure your interests with a caveat or mortgage-

If your contract has a charging or security clause, youmay be able to secure any debt or money you are owed under acontract against another party's property.Retention of titles -

Check your contractbefore signing, some standard contracts such as HIA include a'retention of title clause'. This specifies that the goodsand materials remain in the contractor's ownership until fullpayment is made. Whilst there are only some circumstances where acontractor or builder can return to site and take possession of andremove those materials. Please note that it is important you obtainadvice before removing anything from site, as wrongful removal mayresult in you being pursued for loss and damage to the property orsite, and a variety of other claims which could be brought againstyou.PPSR -

In limited circumstances it may besuitable to register your interests on the Personal PropertySecurities Register (PPSR) in accordance with the terms of yourcontract or as otherwise available to you. PPSR registrations arequite specific, so it is advisable that you speak to one of ourlawyers regarding this.The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.ARTICLE8 February 2023Managing financial and other risks as a Contractor

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