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How can small companies protect themselves from larger contractors?

Was being a casualty of Carillion avoidable?

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 3 minutes

After the initial revelation and shock of learning of the failure of the second largest construction contractor in the country, many sub-contractors and their advisers will be asking what could they have done to avoid being a casualty of Carillion. Some suggest that up to 30,000 firms may be affected.

How can I protect my business?

It is very easy to be clever in hindsight, after all, most people would have interpreted the fact that the government continued to place more contracts with Carillion, even after profit warnings, as an endorsement and indicative of continued support. That said there are some basic precautions which apply to dealing with new contracts.

The structure of your business

Sub-contractors come in all shapes and sizes, one man businesses to large SMEs.

If you are operating your business as a sole trader or in a traditional partnership, you need advice from an accountant or solicitor as to whether this is the best way forward. If you suffer a large bad debt which leaves you short of cash you are personally liable for any debts you have accumulated. In a worst-case scenario, this means you could face personal bankruptcy.

In contrast, if your business operates through a limited company or a limited liability partnership (LLP), in most circumstances you are not personally liable for business debts unless you have given a personal guarantee or indemnity or have operated outside of the law.

Legal advice

If you are entering a contract with the main contractor it is always sensible to let a solicitor cast an eye over the terms. It is essential to know what the conditions and risks are before you commit yourself.

Credit Insurance

If you can, consider insuring against bad debt. It is fair to say that in the case of Carillion, because of the profit warnings it is likely that insurers would have withdrawn their cover – but if they won’t take the risk, there is a serious argument that it may be better to walk away from the work than risk a bad debt. This is particularly so if you are heavily reliant on one or a few contracts, but not an easy decision if you have no replacement work.

Risk profile

There is always a risk if you are heavily reliant on one customer. In the case of Carillion, they had been paying many contractors on 120 days – four months or a third of annual turnover. Unless you have plenty of other work on other sites, risking a third of your turnover with one customer (and possibly your only customer) is a very high-risk strategy.

What if you are owed money by Carillion?

The best place to start is by taking professional advice. At Wilson Field we deal with distressed businesses day in, day out. That’s all we do. We can outline what options are available and exactly how they will affect you. No matter how hopeless you may think your situation is, we can point you in the right direction and enable you to face the future and rebuild your finances.

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