The recent war in The Ukraine and subsequent asset freezing of hundreds of wealthy Russians residents of, or owning properties in the UK, has highlighted a problem that has been under the radar for some years. With the Government intent on cracking down on fraud and money laundering, with so much revenue being lost to the Treasury through various financial dealings – legal and illegal – many individuals and businesses find themselves subject to having their account frozen. This includes bank and credit card transactions, and even short-term interruptions in moving money between parties can be very disruptive.
Landscapers working on a substantial project – say £100,000.00 garden – reliant on regular staged payments, may suddenly receive an email late in the evening from the customer announcing that they are unable to make any further payments due to financial difficulties. Perhaps the contractor may arrive on site in the morning, only to find the gates locked and barred, with a notice to contact a named individual or company affixed to the entrance. If the scheme is mid-way to completion, the contractor must make rapid decisions regarding their reaction to the news.
There are so many different scenarios where this situation may occur, and for the sake of regularity, I will describe a typical landscape project, together with various situations using the same site as an example, with potential solutions to a given set of circumstances.
Project
A privately owned property, freehold, detached house valued at £1,000.000 with a mortgage, currently undergoing a Design & Build landscaping project to the value of £100,000.00 plus VAT, subject to standard terms and conditions provided by the contractor. The house is jointly owned by a couple, both of whom are named on the contract as being responsible for making payments in accordance with a clear programme and schedule of works. The project has been managed under the Construction (Design Management) 2015 Regulations, and all protocols and compliances are in place.
A deposit/mobilisation fee has been paid, with the balance to be paid in three stages, 25%, 25% and 25% on substantial practical completion. The works are at the third stage, with the next 25% due to be paid now. Materials, including bricks and paving are on site to the value of £10,000.00 plus VAT, including fifty trees in containers, ready to be planted as boundary screen features. Various trenches and foundations have been excavated and are waiting to be filled as part of the ongoing programme.
The contractors have hire company machinery on site, with an excavator and tracked dumper, about to be off-hired as their work is complete. A site office/hut and staff toilet has been set up in place within the site. Small tools and equipment may be locked in the shed, along with staff personal items, and wet weather gear/ safety equipment. Essentially, a professionally organised and well-run operation, with all matters regarding Health & Safety in place, materials on site ready for timely use, and everything going according to plan. Site plans and other records including the Accident book are kept in the office.
Scenario One – Bankruptcy/Site Lock-Out
The client, who may have been experiencing financial difficulties for any one of a hundred reasons, having managed to avoid major problems in previous years, is suddenly, and without warning, declared bankrupt by one of their creditors. As a result, their ability to obtain finance from any source has been frozen. Unable to use any credit cards or obtain money from a bank, they find that they are unable to make any further payments to the contractor. Their life henceforth is temporarily subjugated to an appointed Trustee in Bankruptcy (the Administrator), who will require a fully detailed schedule of the customers outgoings and finances. These will be assessed in order of priority, with any assets being evaluated, compiled and allocated according to the order decided by the Administrator.
The administrators Priority Number One will be any monies owed to the Inland Revenue, the Bank probably second in line, with all other creditors waiting in order of merit. For this reason, the clearer and more concise any claim you may make should be carefully costed, proven and relevant to the project to date. You may wish to make an additional claim for any potential costs you may incur as a result of the contract, but cannot currently be evaluated. If you conflate both sets of figures into your primary claim, this may result in delays in getting any payment. You should advise the administrator of any possible secondary claim as soon as possible, but do not request the matter is dealt with in tandem with your main claim.
This process can take many months, with each asset being compiled and valued, then placed into an inventory report, prepared for a formal hearing.
The landscape contractor will most likely be at the very bottom of the list, along with other trades creditors, to be paid a percentage of the forced sale of any property or assets the customer may have. In the meantime, the contractor must decide how to respond to the situation.
Irrespective of any Terms & Conditions that may have been included in the contractor’s documents, including any mention of materials on site remaining the property of the contractor until paid for, the fact that these will be seen as possible assets by the Administrator, nothing will be allowed to leave the site. This may even include hired machinery, without express permission from the officer. Effectively, the whole working site will be suspended until further notice.
In such an event, it is imperative that the contractor gets in touch with the administrators to establish a dialogue, and agree means of mitigating costs and liability. As the hire charges will continue to rise, and every effort should be made to minimise costs as far as everyone is concerned, there should be no objections to clearing the hired equipment off site.
Thankfully, a total lock-out is relatively rare, and I have only seen a handful of such cases (where I am called in as an independent expert witness to produce an Extant Report, basically scheduling the condition of the site/unused materials/plants on site for assessment purposes, at a given point in time) involving a sudden full stop on a project. In most cases, the customer will have time to give due – even minimal – notice to allow the contractor to at least remove hired equipment from the site.
All tools and equipment obviously belonging to the landscaper are not included in the valuation of works assessment, although a brief schedule may be requested to avoid any confusion at a later date. This schedule is forwarded to the Administrator, who will normally allow immediate release of the contractor’s tools, equipment etc.
HOWEVER – any unused materials may not be removed, until ownership has been established by the Administrator, having examined the contract documents and assessed them against any payments made from the customer to the contractor. In other words, the unused materials (in this scenario, including bricks, paving and fifty trees to the value of £10,000.00 plus VAT) will have to be checked against the payment schedule. Only if they have clearly not been paid for i.e. owned by the customer, irrespective of any terms and conditions, will they be allowed to be removed off site as being owned by the contractor.
This is the worst-case scenario, but it does highlight a few issues that you may like to consider.
The first concerns plant and machinery. As their continued presence on site will increase the amount of money owed by the customer to the contractor due to continual charges, and the Administrator is bound to mitigate costs, if you were to make separate charges – weekly or daily – for your larger equipment, as part of your terms & conditions and priced quotation, it would be the case that you should be able to remove these from site as soon as possible, without the need for an assessment of value on site, as they are costing additional money, unlike your small tools and equipment which are not time related.
Maintaining a clean and tidy site, means that you will have left the grounds in a safe condition, with all excavations and footings protected against accidents. (Even after you have left site, if someone was injured by falling into a hole left open by your staff, you may be liable).
Finally, at the end of each day, ensure that the site is recorded and photographed if possible, to avoid any claims of negligence at a later date.
Insolvency – Notice by Customer
This situation, whilst still highly undesirable, is nowhere near as traumatic as having the site closed and barred before your eyes. It is an issue that is becoming increasingly common, as individuals find themselves out of work, or losses in their business or other extreme problems with money, and unexpected bankruptcy looming quickly on the horizon. The client has become aware that they are unable to afford to complete the project, but are able to give you due notice of the problem.
Once again, irrespective of your terms and conditions – which are no use in the immediate here and now, where time may be of the essence – you will need to take stock of the situation regarding the project. This should be done in agreement with the customer, to ensure that there are no issues at a later date.
Hired-in machinery and your own plant should be removed from site immediately, along with any trees and shrubs that remain unplanted. Unused materials may also be removed, by agreement, and subjected to an audit and inventory, noting the condition of the products.
Most importantly, an immediate assessment of the project value at that time must be made and agreed, even if only an approximate figure.
This valuation will/should help to finalise the cost of the works completed – even partially – at that time, in order for payment to be made. This valuation and payment should be appended with a Notice of Termination of Contract – a letter head with those words, to ensure that it is clear that your responsibilities end at that point. Without that document, the contractor could theoretically remain liable to maintain the site (i.e. water the plants, irrigate the lawns etc) as the original contract would still stand.
A full and detailed report showing the site at the time of termination, including photographs and inventory, should protect the contractor from future issues regarding liability. This report should include a formal handing back of any security keys etc that may have been provided by the customer to the contractor during the works progress. This is essential, to avoid any question of liability should the site be violated by trespassers at a later date. No staff should return to site unless by express permission in writing by the customer or the Administrator.
Other Scenarios
Not every financial problem is as disruptive as a sudden halt to a project. A more common problem occurs when a client wishes to call a halt to a scheme mid-way due to lack of funds, not a total shut-down of income which is the hallmark of an insolvency/bankruptcy situation, where bank accounts are frozen. Put simply, the customer realizes that, for whatever reason, they are unable to have the whole of a landscape project completed due to shortage of money.
Once notified, the contractor should immediately conduct a full examination of the contract, recording all costs, including those costs that do not yet show on the project account, with likely costs shown separately. Likely costs may include the maintenance of any containerised trees and shrubs that have been purchased for the job. They will require ongoing maintenance to keep them alive, and may be removed from the site at the request of the customer.
Simply because they are no longer on site, they will have been purchased for the scheme, and cannot simply be deducted from any final figure as they will require ongoing costs, even if it is simply replacing them into stock at the nursery. (By showing these costs, a client may decide to hang on to the trees, and plant them with their own hands). Similarly, any materials that may be removed from site will require a handling and stocking fee, and this figure should be shown as a separate cost in the final balance sheet.
If possible, try and complete sections of a truncated project, e.g. the whole of a paved area, or other hard landscaping feature. The more completed parts of a contract that are finished, the easier it is to evaluate the project costs to date. Whether you wish to offer any warranty, express of implied, on those completed works is up to you. It may be seen as goodwill, and if the client finds themselves able to continue with the plan at a later date, you will have been as helpful and understanding as possible, and may be asked to continue under a fresh contract.
Summary
It would seem likely that the number of cases of insolvency, bankruptcy and unexpected shortages of funds is going to increase in Britain, and there is little we can do to really protect ourselves by due diligence or client checks. It will become even more important to maintain a very tight company policy, keeping a close eye on projects on a daily basis, ensuring all of the issues mentioned above – site security, cleanliness, progress records/photographs, materials and equipment schedules, daily diary, and full breakdown of unused materials stored on site for use on the project.
Obviously, strict adherence to payment schedules is crucial, and for this reason alone, I advocate using an Escrow system of payment, where the whole of the contract sum is held by a third party (solicitor or other similar legally qualified individual) and released upon a known and agreed set of rules including project progress/materials on site, for all projects over £100,000.00, as a safe and reliable method of ensuring timely payments.
By protecting your own business, you are also protecting those of your suppliers and workforce. Due diligence is vital, but contemporaneous and complete knowledge of the current situation on any major project is equally important, in case you have to suddenly face an unexpected and total stop to a contract, when precise information will be invaluable.
