How can the hospitality and leisure sector protect itself from contractor insolvency when carrying out development works?

Insolvencies in both the construction and the hospitality and leisure sectors are relatively rife compared to others. As at May 2024 (the latest statistics published), the construction industry had the highest levels of insolvency of any sector in the preceding 12 months at 17%, with accommodation and food service activities not far behind with 15%[1].

Despite this, hospitality and leisure companies appear to be instructing more and more construction works, with data analysts Glenigan[2] forecasting that the underlying value of hotel and leisure projects starts (work valued at £100m or below) will leap by 14% this year, demonstrating that despite these statistics both sectors still have a significant need for one another.

A contractor which becomes insolvent during an ongoing project is likely to have a huge detrimental impact on the employer’s budget, as well as timelines for delivery. So, how can those in the hospitality and leisure sector seek to protect themselves from such undesired outcomes?

Plan early

1. Engage your design team and contractor in good time before works commence to allow for the works and site to be scoped out and planned beforehand.

This will minimise the need for provisional sums. It should also allow the contractor to be able to use the trades that are familiar and which it considers are best suited to the task, rather than be reliant on who happens to be available. If you are undergoing a tender process keep hold of those who came close to winning the contract as they may be interested in finishing the project, thus saving you from having to re-tender entirely.

2. Assume there will be surprises and allow for flexibility in both budget and programme for works.

A situation may arise that neither party anticipated but which the contractor, at least legally speaking must bear the cost and time impact. While we are not advocating that a contractor should not honour the bargain it has struck, there will be situations where the employer choosing to force the contractor to incur costs (or penalties) that will render it insolvent, will in the long terms prove worse for the employer since they will have to re-start the project with a new contractor. If the employer has allowed themselves some flexibility to increase their budget or prolong the programme, then they at least have options.

Have robust contracts and know how to use them

3. Construction law in the UK has numerous quirks that companies may not be aware of, for example, different options for the making of interim payments, rights to withhold payment, rights to correct past payments, set penalties for failure to hit targets and processes for resolving problems. Ultimately there are also different rights dealing with termination and post-termination obligations. Many of these can be drafted to either better suit the employer or the contractor. Often it is a matter of give and take, but knowing the terms of your contract and how to operate them can protect an employer from being forced to pay sums it considers are not due to a contractor whom they fear is about to become insolvent. 
    
4. At the contract stage there are also many options for putting additional securities in place (bonds and vesting certificates are two such examples) that protect the employer against an insolvency event. One area where the hospitality and leisure sector can be more at risk is that they often have a requirement for advanced mechanical and engineering plant and securing the necessary equipment in these times of unreliable supply chains frequently involves making advance payments. Ensuring that you can recover such equipment as being your property which you have paid for is a key consideration as without the right contract this may prove difficult. 
    
5. The administration of the contract should be undertaken by a competent contract administrator, as they will often be handing notices, valuations and payment, timescales etc. In the hospitality industry where finishings and M&E are both vital and expensive to correct if not adequately installed first time, it is worth considering appointing a clerk of works to understand quality control as a project proceeds. 

Be alive to warning signs

There are often warning signs that a contractor is having financial troubles, which if recognised can give the employer the opportunity to engage in discussions with their contractor to try and ensure that at least their project is finished or to beginning planning for rescuing the project should insolvency prove inescapable. We set out some examples below (it is not an exhaustive list).

1. Is performance on site deteriorating? Has there been a slowdown in progress, a decrease in labour or contractor’s personnel on site, and/or turnover of contractor’s key personnel, plant, equipment or materials suddenly disappearing from site for no apparent reason?
    
2. Has the contractor sought to change any payment arrangements? For example, has the contractor (i) suddenly started to be requested early payments so they can place orders, (ii) invoiced earlier than normal, (iii) issued multiple or duplicate invoices (iv) increasingly overvaluing its completed works, or (v) made questionable claims or contra charges without evidence? All could indicate that the contractor is experiencing cash flow difficulty.
    
3. Supplier and sub-contractor relationships. There may also be indications that the contractor is not paying its suppliers or sub-contractors, for example, if a sub-contractor approaches the employer directly to complain about non-payment). Other indicators include if the contractor keeps changing suppliers, or sub-contractors without warning, or delays in obtaining goods and materials without credible explanation, may all suggest that lines of credit have been used up, or the contractor has cash-flow problems.
    
4. What does Companies House show? While Companies House isn’t always up to date with recent filings, it is a good place to start to check a company’s financial health. Late filing of accounts by the contractor at Companies House or threats of winding up by Companies House for failing to file mandatory paperwork is a warning sign. The sudden registration of a similarly named company with the same directors and owners may also be a sign of an imminent insolvency and phoenix situation. Although, it should be kept in mind that several contractors are in the habit of setting up multiple companies each of which is used for a specific project, so this should only really be classified as a warning sign if it is outside the contractor’s usual behaviour.
    
5. Unsatisfied court judgments against the contractor and charges registered against company assets can also be found online and are indicators that the contractor is taking on increased debt.
    
6. It’s also worth listening - usually, if a contractor is having financial issues there would be rumours in the press, in the industry, on site or elsewhere on other projects.

If, at any point during your construction project things concerns start you should review your contract documents and if in doubt as to your position, seek legal advice.

If you are planning to undertake some significant construction works in the near future and have not yet decided which contracting method is best for you, consider seeking legal advice.

Stevens & Bolton can support hospitality and leisure companies at any stage of a construction project and we routinely advise on refurbishments for hospitality and leisure companies including luxury hotels, golf clubs and restaurants. For more information on how we can assist with your project, contact our construction and engineering team.