How builders reach the point of collapse
In a business world where multiple contracts tie multiple people into a major project, cashflow and time are critical.
But, with so many moving parts, it's easy for things to fall apart, sometimes in spectacular fashion.
Below is an explanation of how the relationships between builders and subcontractors should work, when all the moving parts are in sync, but it's clear how easy it is for things to go wrong, and why even the best-intentioned businesses can collapse almost out of the blue.
WHEN THINGS GO RIGHT
■ The construction industry is built on a series of contracts that cascade down from the head agreement between the builder and the client and cover every aspect of a project.
■ When a building company tenders for a project it invites trade specific subcontractors to quote on the various construction elements from the plans.
■ The builder then collates and submits a price for the whole project and, if successful, secures the work.
■ Cashflow and time are critical.
■ When things go right, every level of the contract chain meets its progress deadlines and payments are dispersed on time and in full.
■ The client makes a progressive payment to the builder at predetermined intervals throughout construction. Statutory declarations are required, confirming that all invoices for suppliers and subcontractors have been met to date as per the contracts.
■ Subcontractors invoice according to their agreement with the builder.
WHEN THINGS GO WRONG
■ A builder may get his pricing wrong or may deliberately quote too low as a means of securing work to pay past debts.
■ Subcontractors are exposed as unsecured creditors to the builder.
■ Their own lines of credit to their suppliers are secured against their own assets. They also pay their workers in advance of any payment they receive for work done.
■ When a builder fails to pay on time - for whatever reason - subcontractors are placed under immediate stress to meet wages, to stay inside credit limits set by suppliers and to cover tax and superannuation payments,
■ Many subcontracts require invoices to be submitted by the end of one month, for payment at the end of the next.
■ If a builder fails to pay on time the subcontractor can be exposed to up two months or more of their own debt.
■ Many examples exist where builders seek to exit the industry without being vulnerable to claims by secured creditors over their own assets.
■ One method of doing this is to pay down secured creditors with money owed to unsecured creditors for their work and materials.
■ A company director may also seek to transfer assets from one company to another, ahead of going into voluntary administration and then liquidation. This process is known as 'phoenixing'.
■ It is a crime to falsely sign statutory declarations that a principal contractor's workers, subcontractors and suppliers have been paid.