Case Study Flashcards
• What did your duties entail?
• Change Management
○ Instruct substation base
○ Instruct disposal on separate site
• Contract Admin
○ Completion /non
Monthly valuations
Taking meeting minutes• Why was the contractor facing material and labour issues?
- Increasing inflation (demand outstripping supply)
○ Brexit (change to existing supply chain - constrained supply)
○ Covid
- Widespread breaking of supply chains due to nationwide closures
- Pent up demand over lockdown and continued social restrictions - Interest rates rising but still historically low (cost of debt remains attractive)
- Supply shortages
- Labour shortages
• Why would this impact on their cashflow? (Material and labour increases)
Sub Contractors were unable to maintain price
Main contractors margine was squeezed
Could they not have foreseen issues with materials and labour?
Issues were known prior to contract but continued to worsen.
e.g. Ukraine Conflict
• Whose risk is this? (Rising costs)? Which procurement route would this be a client risk?
○ The Main Contractor takes the risk for cost (trade packages under D&B).
- Between contract award and sub contractor procurement prices increased which squeezed the MC's margins - On Construction Management this would be a direct client risk.
• What would the implications of non-completion be? Did you issue one?
○ Non-Completion identifies that the contractor has not completed the work as outlined in the contract.
The implication of this is that time is not at large in that now the MC is liable for liquidated damages.
Non completion notices were duly issued for all units.
• Why would the contractor request direct payment for materials?
The contractor was having cashflow issues.
Where usually the MC might acquire materials at the start of the month and then get paid at the end, due to increased demand they were having to cashflow this payment for 2-3 months.
• Signs of contractor cashflow
- Significantly reduced site labour / activity
- Overclaiming on valuations
- Subcontractors and contractor consultants reporting late or no payment
- Requests for advance payment
- Programme delays
- Difficult to get in contact
- High staff turnover / reduction in staff
• What is the main risk of making an advance payment to the contractor? What happens if the contractor is replaced?
- If a payment is made to the contractor but is not permitted under the contract i.e. cannot be directly attributed to something at least not in the correct way then this money would be at risk.
e. g. If £1m was certified and paid to the contractor but they subsequently became insolvent the main risk would be the accuracy of the works valuation.
Works could be taken over by another contractor after costs of securing site, clearance of existing site setup and the appointment of a new party.
However if the contractor was paid £100k directly from the client and they went insolvent then this payment would be lost if it was not appropriately aligned with the works
• Why did the client verbally agree to pay the contractor? (outside of contract)
- The contractor requested payment directly from the client to secure cladding materials however the client had not consulted me before doing this.
- The client was seeking to help the contractor to ensure materials were secured to avoid further delay but did not consider that this payment would be at risk
• What did you say to the client about this? (agreeing to pay the contractor for advance payment without contractual arrangement)
What did you suggest be done instead?
- I advised the client against paying the contractor directly as the funds would be at risk. (Not obligated to pay as not included in the contract)
- Discussion was required as to how to work with the contractor to improve progress but not put the client at risk.
Why could you not include the advance payment for the cladding in the valuation?
Would it not be the contractors risk if they were paid?
- Payment for the cladding was not listed in the contract.
- The clients fund would be at risk as there would be no mechanism for identifying the payment in the contract.
What is the advance payment process?
- Item listed in the contract and should include date of payment and when contractor will pay it back i.e. deducted over remainder of contract
- Vesting certificate (confirms transfer of ownership from supplier)
- Item clearly marked and protected (in storage facility)
- Insured against specified perils until delivery to site (contractor assumes risk)
- Must be an Advance Payment Bond to secure the payment against contractor default
- The Bond should be an on-demand bond to pay out immediately on demand rather than with preconditions
• Would a contractor not normally be expected to make an advance payment for materials?
Why were suppliers increasing requirements?
- Due to the unprecedented lack of supply vs demand suppliers have been de-risking themselves by increasing the requirements of securing materials with demand increasing as well as the material costs
• WHat was the impact on the MC from the supplier requesting payment before it would usually required?
As the supplier was requesting payment ahead of when the material would be required on site the contractor had not anticipated for this in their cashflow so they would be say outlaying say £100k and would not get this back for 2 or 3 months.
Whilst in isolation this might not appear significant, several key packages with this requirement across contractors projects can be a risk and is something they need to carefully consider. Hence why they requested payment from the client.
What is cashflow?
What is the main impact of the MC not managing cashflow?
WHat is the worse case scenario for poor cashflow managment?
- Cashflow is the management of money in and out on a month on a monthly basis.
- For the contractor they need to understand all their costs and when they will be due and when they will get paid from the client.
- If the contractor is slow to pay sub contractors this will likely impact their reputation and sub contractors are unlikely to perform and will look for work elsewhere.
- End result is that they are unable to pay debts and risk becoming insolvent.
What was the risk for the Client if they did not make the advanced payment to the Contractor?
The contractors cashflow position could worsen which would slow down progress against the programme.
Whilst this was the contractors risk it (LD’s) the programme would still suffer.
• In hindsight should you have refused to aid the contractor and left them to resolve the problem?
- There was a genuine concern that the contractor was facing cashflow issues that could have resulted in insolvency.
- It would not be in the clients interest to see the contractor fall into insolvency as re-tendering mid contract would have taken longer and been costlier than supporting the contractor.
• How did you deal with the fact that the client had agreed to pay the contractor ?
- I highlighted to the Client that their funds would be at risk as the advance payment was not listed in the contract.
- I iterated to the Contractor that the Client was not obligated to make an advance payment under the contract but I said we would work collaboratively to deal with the issue
• If the client payment could not be considered how could have it been dealt with to include it?
Whilst not obligated the same procedure could have been followed for advance payment.
A deed of variation to the contract would have to be instructed to list the item in the contract.
What is an advance payment bond?
Why was it not used? (Even if it was included in the contract?)
- An insurance backed product, provided by the Contractor as surety against the contractor not performing / becoming insolvent.
- The Bond should be an on-demand bond to pay out immediately rather than with preconditions (conditional - employer has to proove non-performance and resultant loss)
- Detrimental to programme and cost to contractor would worsen their cashflow (likely to be expensive given to procure a bond due to their cashflow issues)
How much would an advanced payment bond cost usually?
How would a contractor justify the cost?
How would the cost of the advanced payment relative to the contract sum impact on negotiation?
Would it be more given the contractors cash flow position?
○ Typically the would cost in the region of 10% of the insured value. e.g. £100k of advanced payment (Total Material Cost circa £1m) would cost £10k.
The contractor must weigh up whether the cost of this can be justified to ease its cashflow.
if an essential component of a scheme was 10%+ of the contract value then market might dictate that the client pays or shares cost with contractor but if an item was of a much lower value (relative to the contract) the bond cost would more likely have to be covered by the contractor.
When are advanced payment bonds typically used?
High value or tailored items have to be made well in advance (2 months+ from when they are required)
Cladding
Lifts
What sort of item might this relate to? advance payment
For example, a specialist MEP such as a lift which needed to be ordered well in advance of it being required onsite.
Steelwork - tailored to project
Cladding - specific colour made to order
• Why was the bond deemed commercially un-viable?
- The contractor was facing cash flow issues
- The cost of the bond would further increase the contractors costs and put greater pressure on them
- Question on whether they would have been able to procure a bond at all
Who would have paid the premium for the bond in this scenario?
Who would pay usually?
- The contractor would pay the premium
- The bond premium might get added to the contract sum if for example the item requiring advanced payment was significant relative to the contract sum (5/10% plus)
Did the contractor make an EoT claim?
- The contractor made a claim that they were impacted by the prevailing economic conditions in respect of material and labour shortages and price surges.
- However this could not be attributed to a Relevent Event under the contract.
NOTE - Client informally advised the contractor that he would not deploy LD’s if the contractor achieved the revised contractor projected completion date (revised programme).
This was not formally confirmed and the client reserved the right the issue LD’s anyway.
Why didn’t you award one an EoT if the client had suggested he would not deploy LD’s?
- Maintain the contractors responsibility for delivering the works (threat of LD’s)
The Client has appointed the contractor to undertake the works and although the economic climate was challenging the Contractor had knowingly agreed to undertake the works and be liable for Liquidated Damages should they fail to achieve the works in the set timescales.
How would you issue an EoT?
- Assess contract claim (RE)
- Respond within 12 weeks or sooner if completion sooner
- Confirm to the contractor the agreed revised completion date
L2 - Delay in approval of 2 weeks
How would the issue of an EoT remove the right of the employer to deploy LD’s?
The EoT put back the contract completion date
Why did you decide to not to issue LD’s?
- Progress was very slow and contractor readily admitting they were having cashflow issues.
- Commercial decision taken to avoid further squeezing contractor where they had lost their margin
- LD’s are primarily set to discourage the contractor from not progressing the works (otherwise there would be no reason for them to complete the works on time)
How was the client to supplier payment implemented?
Ok for Client to acquire materials directly
10% initially then full payment
MC/SC request when required
Delivered to site
Works valued via interim payment
Pay less notice for direct payment to SC and supplier
SC is paid directly
** Is supplier paid in full upon delivery?
Once the cladding had been assembled the works would be valued less the payment made direct to the supplier
What were the risks? (Direct Payment)
What was the main concern of paying the main contractor?
Contrast against advance payment to MC The main concern of paying the contractor in advance for materials when they were experiencing cashflow issues was that if they did become insolvent it would be challenging to reclaim the advance payment of the materials.
The key downside was that the client was having to outlay funds ahead of expected.
• Would the Client become responsible for the materials when they got delivered on site?
The Contractor would still be responsible for the materials when they arrived onsite in terms of protecting and securing them.
Why were you concerned about materials being delivered prematurely?
- It is not beneficial to have materials on site too early as they must be protected from weather and on site activity as well as being secure from theft.
• If the contractor were to remove (steal) materials from site would there be less risk if they were installed or not?
- If the materials had been installed and subsequently removed this would be preferable to the Client as they could initially be included in a valuation and then a pay less notice be issued to deduct payment to account for the theft.
• Did you not pursue other cladding suppliers?
○ We did discuss with the MC whether they could acquire materials from another supplier and we did consider amending the material however it was apparent that due to demand massively outstripping supply there were limited options.
In order to secure materials suppliers had started stipulated that greater sums be paid ahead of when they would usually request them. e.g. 10% deposit to secure order
• Why was the supplier doing this? (Aside from simply taking advantage of the situation)
The entire supply chain had become strained and costs were escalating across the board due to all the uncertainty of lockdown and limited labour supply
• How did you present the options to the client? e.g. critical analysis (consideration of contractual implications)
I clearly set out each of the options along with their pros and cons.
• How did you address the fact that paying the contractor directly was risky?
○ I was direct to the client in that they should not pay the contractor directly
○ Making a direct payment to the contractor not in accordance with the contractor will not benefit from the protection that the contract provides to the client.
• How did you demonstrate collaboration with the contractor?
○ In accordance with the contract there were no listed items for advance payment so the Client was under no obligation to make a payment.
○ I acknowledged the challenging economic climate in respect of material and labour availability and cost.
• Should you not always be collaborative? / Why was this significant?
- My first obligation was to protect the clients’ interests.
- Whilst the contractor could have been left to deal with the issue themselves, by taking a collaborative approach it was deemed to be beneficial overall to the project.
• How did you demonstrate Client Care? e.g. payment to contractor bad idea - looks at other options
○ Whilst the Client ultimately makes project decisions, they took a decision which could have placed their funds at risk.
○ I demonstrated Client Care by clearly outlining the risk they held by directly paying the MC for advance materials outside the contractual requirements.
What did you learn on the project?
- Collaboration is key to project success.
- The contract clarifies risk and responsibility for each party but they still need to work together.
• Is there something you could have done better?
- Whilst I wasn’t involved at the tender stage of the project the client negotiated very hard with the contractor squeezing their margins.
- Although the contractor agreed to the price for delivering the works, the project illustrated that there can be detrimental consequences to one party taking most of the risk.
• How could you of checked the contractor financial standing? Or how would you?
At tender stages:
- Request and review company accounts
- Credit rating,
- References from previous employers .
• What might be concerning / be a red flag? (Contractor Company Review)
○ A falling working capital ratio
○ Dropping profit levels / falling cash flow
○ High borrowing levels
○ Declining credit rating (Experian)
• Did anything else go wrong on the project?
○ Another one of the key sub-contractors (steelwork) contacted the client to say there were getting paid late by the MC. This followed on from slow progress and the MC requesting advance payment for cladding materials.
○ Following consultation with the MC and SC it was agreed that the SC would also be paid directly. This was implemented by certifying progress on site under the main contract and then issuing a pay less notice to the amount due to the contractor.
What was the cladding package value? Was the £100k a deposit/part payment?
£1m
Yes
• When would the client be repaid?
- The payment would be deducted over the the remaining duration of the project
e. g. £1m split over 5 months - £200k x 5
○ In essence the client was cash flowing the contractor for the cladding
• What were the implications of the project being on 3 separate sites?
○ There were efficiencies that were realized mainly due to the close proximity of the sites however each site still had to have its own site setup with temporary services, security.
• What was the cost per £/m2 of the scheme?
£60/ft2
• What were the key “Other Project” aspects
○ EA fee
○ CDM advisor
- Ecology Fee (Butterfly mound had to be protected from construction and regularly inspected)
• What is a dock leveller? Level access door? (Inc Construction details)
○ A dock leveller allows a lorry to reverse up to a warehouse and open its doors at the same level as the warehouse floor to make loading easy (avoid lifting)
○ The frame for the gap is pre cast concrete to protect when the lorry comes up against the warehouse (If it was just cladding it would get damaged)
○ Level access doors allow trucks to drive into the warehouse and typically have roller shutter doors
• Why didn’t you recommend a traditional contract? Construction management?
○ A traditional contract would not have provided cost certainty and the client would take the risk for the design.
Construction management would have been more economical however the client would take the programme risk and have to coordinate the works.
• Why did you chose a Parent Company Guarantee?
WHo was the PCG company?
DId you contact the PCG? Did they assist?
○ No cost
○ Parent company to take obligation of contract should contractor not perform
○ Utilized for the contract limitation period where as a Performance Bond expires on completion
Mark Wakefield Demolition
The Managing Director did attend meetings and generally aided the MC (ECE) in moving forward progress.
• Disadvantage to PCG?
If subsidiary company is insolvent then the Parent Company may also not be in good financial health (check PC as contractor) or disinterested to support a declining business.
Equally the PCG may be very motivated to support the MC to get them back into financial shape.
• How did you check the PCG?
○ I wasn’t involved at tender stage but if I was I would have undertaken the same checks for the contractor:
Credit check (Experian)
Turnover
Profit
Cash flow
• Why did you not also have a performance bond?
○ Cost circa 10% plus of contract and would further worsen contractor cashflow position
Question over the terms that would be available given the contractor was not performing well financially e.g. conditional pay out would have been likely which would not be favourable to CLient
• Are there any other security options?
○ Retention - for defects rectification
CW - Hold MC accountable to third parties (funder)
• What is assignment?
CW’s should be assignable e.g. client can pass rights to a buyer
• When would you use a letter of reliance?
○ For pre contract investigations such as GI, Flood risk where information has informed design
○ If the information provided proves to be inaccurate then the party can be pursued for damages
• Why would the contractor be interested in an LoR?
○ If there is no LoR then there would be a question as to the validity of the information.
- i.e. why would the informing party not wish to be held to account.
• What is the purpose of liquidated damages?
Discourage the contractor from failing to complete works by the contract completion date
• Whos sets the LDs?
Client
• How did you set the level of LD’s?
Did you advise what the figure should not be construed as?
○ I advised the client that they should establish what loss they might incur should the project complete later than agreed in the contract
- loss of rent
- increased finance
I was clear that the figure should not be construed as a penalty
• Why did you choose a single stage tender process?
The design was uncomplicated and so contractor input was not required
• Why was the retention set at 3%
○ This is the standard % for D&B.
○ It is a market accepted level
Deemed as a sufficient figure to incentivise the contractor to close out any defects
• Why was the defects rectification period 12 months?
○ A 12 month period allows for a full cycle of seasons to flush out any issues arising due to change in temperatures
• What component of a Collateral Warranty would be essential to a funder?
○ Step in rights - Allows the funder to take control of a project if a client becomes insolvent
