Once again the headlines highlight that no company is too big to fail. This time it is the giant construction company Carillion that entered into liquidation early this week.
In the coming days you will probably hear a lot about the social, economic and political impacts of the aftermath of Carillion’s liquidation. What you will not hear about much, however, is how the circumstances behind the Carillion crisis may also happen to small construction companies with the same devastating effects.
The news reports high debts, high-risk contracts and high cost overruns as the main causes of the deterioration of Carillion’s financial situation. These problems can easily become part of any construction business of any size if you don’t keep a close eye not only on your accounts but also to the contracts with your clients, suppliers, investors and lenders.
High debts sometimes businesses need to borrow money – and we are certainly not saying you shouldn’t do it. However, you need to make sure the terms and conditions under which you borrow money are compatible with the terms and conditions under which you receive money from your clients. Talking about clients, you should ensure that what you promise to them can be met by what your suppliers can deliver to you. Otherwise, what you owe to your suppliers may not be not covered by what your clients pay you.
High-risk contracts taking some risk is certainly part of the game, but before you start a project you should carefully consider which risks you are willing to be held accountable for and ensure they are written down in a way that makes it crystal clear what you are taking on and what you are not. If you don't do so, you may end up in endless discussions on who should have done what, wasting time and money. Your contracts are the best place to split risks between you, your clients and your suppliers. Ideally the party who knows more about a certain risk should be responsible for managing it.
High cost overruns nobody wants them but everybody knows they may happen – especially if something unexpected happens. Pricing your services and products correctly – and with the necessary contingencies for the risks you are in charge of managing – is a top priority. On top of that you should also address what will happen if the risks your clients and suppliers took on actually occur. How will you deal with the delays and costs that may arise? Your contracts are the best place to clarify this.
We know it may all sound a bit too much for a small business but don’t be fooled into thinking that it only happens to big construction companies. These big problems can – and do – happen to small construction businesses and indeed SMEs of all sizes – even those just starting out! LawBite are here to help the not-so-big construction businesses to navigate their way and thrive within the turbulent waters of this complex sector.
To consult with Carla, please submit an enquiry for a free 15-minute consultation or call our friendly team today on 020 7148 1066.
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