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 Trevor Drury |
Contractors
and clients: survival tactics to manage risk
By Trevor Drury, Managing Director, Estia Consulting, Bristol
With the volume and value of construction contracts falling, credit lines
being shortened, slow payment practices rife and companies facing a reduction
in turnover it's going to be a challenging year.
Couple that with the fact insolvencies within the building and construction sector were up by almost a third last year and it becomes clear that the time for taking risks in business has long passed.
Watertight contracts and astute commercial management will be the key for businesses preparing to ride out the coming year.
The ripple effect of insolvency has seen many businesses pushed to the brink of their comfort zone. For clients commissioning work, contractors and sub-contractors, now is very much the time to batten down the hatches, review existing paperwork and take preventative measures to avoid unnecessary risk.
As a starting point, it really is as simple as keeping your eyes peeled and your ears to the ground. Do your research. Check the financial status of the company concerned with data from a reputable credit reference. Look for whether there has been an increase in the number of days the firm takes to pay its invoices, a decrease in the amount of share capital or late filing of company accounts. Also be aware of 'real time' financial data; that is, the word-on-the-street. Rumours of late or non-payments to supply chain partners are generally a good sign of deep-rooted problems.
Don't be afraid of increasing contractual requirements and involving third parties.
When trading with a subsidiary company ask for a Parent Company Guarantee (PCG) if the holding company is financially secure. This guarantee is free, therefore should not add any additional costs to a tender but provides peace of mind.
If a PCG is not an option, obtain a performance bond which is usually for 10% of the contract sum - ideally an 'on demand bond'- taken out with the contractor's bankers which minimises the risk as it can be called as soon as there is a default. If this is difficult to obtain alternatively, a surety bond should be sought from the insurance market. The premium quoted by the bondsman is generally a good indicator of the company's financial position as insurance companies rely on 'of the moment market intelligence' to assess risk levels. With a surety bond the recovery of funds after a default can take time as losses must be proven, which is why an on-demand bond is preferable if it is available.
Common-sense precautions such as not paying for materials off site unless the appropriate vesting certificates are in place, stating that the title has been transferred to the client, that materials are stored separately and that they are labelled clearly (denoting goods are the property of the client rather than the contractor) are also important.
However, performance issues, particularly in this sector, are often two-way and, therefore, contractors should apply the same principles to protecting themselves in their dealings with clients and to help safeguard part of their cash flow.
It is completely reasonable for the contractor to request that Retention deducted by the client is placed in a separate bank account and designated that the account is for the purposes of Retention and held in trust by 'the Employer'.
Sub-contractors and suppliers should also ensure they have a retention of title clause in their contracts, as this ensures that title in goods supplied only passes to the contractor or sub-contractor on payment in full and in the event of insolvency the Receiver or Liquidator cannot sell these materials to the benefit of other creditors.
In my experience, pressure
to win contracts as competition increases in the declining private sector
may result in the temptation to cut corners and margin to secure work.
Self-preservation is a crucial objective for any business as insolvencies
continue to rise and the future remains unpredictable.
 Inez Anderson |
Top tips
to cut staff costs before considering redundancies
By Inez Anderson, Director, Smith & Williamson, London
According to the Office for National Statistics, the redundancies level
for the three months to November 2008 was 225,000, up 78,000 over the
quarter and up 101,000 over the year. This is the highest figure since
comparable records began in 1995.
Employee costs are the most expensive part of any businesses’ budget. In the current climate, businesses are looking to save money, and as we have seen many people have lost their jobs. There are some steps that businesses can take to reduce what is often their greatest cost, with "cutting jobs.”
Salary sacrifice
One option is using salary sacrifice arrangements to provide benefits. Under such arrangements, salary, which is subject to tax and national insurance can be sacrificed in exchange for benefits the employee was previously paying for out of after tax income. The greatest savings are achieved when the benefits are tax and social security exempt.
Typical examples are childcare vouchers, pension contributions, car park facilities and staff canteens. This reduces the cash salary on which the employee pays tax and both the business and the employee pay National Insurance contributions. The net result is that the business and employee save national insurance and the employee saves the tax cost on the salary sacrificed as the benefit is being bought out of gross salary, not net.
To be tax effective a salary
sacrifice must take the form of a written amendment to the employee’s
contract, be made in advance of the salary entitlement crystalising and
not be capable of being changed back at short notice. It’s also important
to watch what impact, if any, there may be on entitlement to state pension,
state benefits such as maternity and sickness and child tax credits.
For companies that already have flexible benefit schemes in place, it
may be appropriate to stop employees selling holiday back to the business
as this is a cash cost to the company. Encourage staff who are not busy
to purchase additional holiday, ie, take extra unpaid leave.
Review existing schemes
Ensure that you are getting the best rate for staff benefits such as life and other insurance-based benefits, especially in the light of recent age discrimination legislation. With an older workforce permanent health insurance and private medical insurance are particularly expensive.
If redundancies are inevitable
If you do have to make some redundancies and are negotiating it is important to remember that the first £30,000 is not always tax free and also that more than £30,000 could be exempt from NI.
The employment law aspects
of termination arrangements can be complex and we often find that businesses
focus on these and forget about the tax and national insurance issues.
Careful planning and consideration should be given to these areas as there
is the potential for substantial savings to be achieved.
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Last updated: 30 April 2009