Cash advances could give contractors a much-needed lifeline
Developers and other construction project sponsors are demanding increased oversight over how contractors are passing money down to sub-contractors to reduce the risks of subcontractors going bust, says Boodle Hatfield, the leading private wealth law firm.
The failure of subcontractors because they have not received payment from the contractor regularly halts construction projects with the delays pushing the project into a financial loss for the developer. However, the economic shock of the “lockdown” is increasing the risk of this problem happening as contractors try to build a cash cushion by holding on to money that should be paid to subcontractors.
As these building contractors and subcontractors already run on narrow margins, there are concerns that even small cash flow disruption could have a devastating effect. If contractors were to become insolvent, this could potentially put all the projects they are currently working on in jeopardy.
In order to mitigate risks, developers are trying to identify any potential liquidity issues at an early stage and force contractors to pay subcontractors on time.
Boodle Hatfield says that some developers are considering giving contractors extra money or cash advances to help see them through the current crisis and keep them on site. These developers view this expenditure as something that in the long term will save them money. If projects overrun or collapse because of contractor insolvencies, developers could lose money for failing to delivery their project on time.
John Wevill, Construction Partner in at Boodle Hatfield, says: “The willingness from developers to provide contractors and sub-contractors with financial assistance to ensure work can continue has become increasingly widespread since the lockdown begun.”
Navpreet Atwal, Partner at Boodle Hatfield says: “Many construction projects have already suffered from serious delays because of the lockdown. A further delay, because of the insolvency of one the projects important subcontractors, would chaos havoc with deadlines and the finances of developers.”
“To avoid that, developers are having to be unprecedentedly active to keep money flowing down the supply chain.”