Protecting a building project from bankruptcy etc?

[singlecoil]

Some friends of mine make oak framed buildings, anything from porches to multi-car garages with rooms above, that sort of thing. Very nicely made too, all the correct joints and secured with oak dowels etc. They have a potentiall customer who is keen to go ahead on a project valued at around £40K, but who is worried about what would happen to his money, which would be paid in stage payments, if they should happen to become bankrupt before it is completed. Apparently credit insurance isn't available on contracts to private clients of less than £100K.

I should add that their credit is good, and that they have completed many contracts of greater value, but those have been on-site whereas this would be mostly off site, most of the work being done in their workshop.

[Manks]

singlecoil said:

Some friends of mine make oak framed buildings, anything from porches to multi-car garages with rooms above, that sort of thing. Very nicely made too, all the correct joints and secured with oak dowels etc. They have a potentiall customer who is keen to go ahead on a project valued at around £40K, but who is worried about what would happen to his money, which would be paid in stage payments, if they should happen to become bankrupt before it is completed. Apparently credit insurance isn't available on contracts to private clients of less than £100K.

I should add that their credit is good, and that they have completed many contracts of greater value, but those have been on-site whereas this would be mostly off site, most of the work being done in their workshop.

Are they a limited company? Is so it is not unusual at the moment to offer or be asked for personal guarantees on the money.

If not limited, is there any way that payment can be made by credit card? Section 75 protects purchases up to £30k. Might need to check that if the true gross price is £40k the first £30k is still covered. If not, break the order legitimately into more than one part.

Other than that, make sure stage payments reflect the value of work completed and ensure that the contract stipulates that the customer owns the part-completed work.

If they are not limited, have a good credit rating and own their own home the customer PROBABLY shouldn't have too much to worry about and if he/she doesn't agree, they can buy elsewhere.

Of course it is possible that the risk is on the other side. It is not unheard of for a customer to say, "look this is a big order, I cannot be sure you won't go bust, I will pay when the job is finished" for the supplier then to find that upon completion the customer either doesn't pay at all, pays only part of what is owed or pays what is owed very, very slowly.

[singlecoil]

They are not, at present, a limited company. The credit card idea sounds like a very good one, and the £30K limit would probably cover the off-site part of the work, then by the time the goods were on site they would be the property of the client anyway.

Presumably if the client can afford the £40K for the building then he should have no trouble increasing his CC limit to the required level.

[Simpo Two]

It's an interesting question; I had the same issue when buying a boat last year. I'd offered a very low price which to my surprise was acccepted, but in return the builder was noticeably keen to get the contract signed (I suspect he had an exhibition stand to pay for or a bank to please) and the draft version asked for 100% up front. That seemed a bad idea to me, I had to keep some kind of stick - but I felt obliged to make a gesture due to the good deal. I asked what would happen if his company went pop during the 5 month period before launch. He said something about separate accounts and something else I can't remember which may or not have been true - anyway, I paid 75% before work had begun, and 25% after launch and sea trial. Possibly foolish but I got my boat.

[Manks]

singlecoil said:

They are not, at present, a limited company. The credit card idea sounds like a very good one, and the £30K limit would probably cover the off-site part of the work, then by the time the goods were on site they would be the property of the client anyway.

Presumably if the client can afford the £40K for the building then he should have no trouble increasing his CC limit to the required level.

It doesn't all need to be paid by card to get S.75 protection. They could pay a small percentage of the price by CC, the rest in cash and still be covered for the full £30k if the goods were not delivered.

[MOTORVATOR]

If they are a bona fide company, get their bank to provide a performance bond effectively insuring the client against non performance.

http://www.zurich.co.uk/gsg/productsandservices/pr...

It is the norm for the client to pick up cost of said bond or at least for the supplier to have included for it in their quote to begin with having been asked.

[mattdaniels]

I'm possibly having a brain fart here, but why does the customer have any credit risk? He's paying staged payments for completed works, so if the guys were to go bankrupt mid-stage he keeps what he's paid for and hasn't lost any money, he just has the inconvenience of getting someone else to finish the job?

[singlecoil]

mattdaniels said:

I'm possibly having a brain fart here, but why does the customer have any credit risk? He's paying staged payments for completed works, so if the guys were to go bankrupt mid-stage he keeps what he's paid for and hasn't lost any money, he just has the inconvenience of getting someone else to finish the job?

AIUI the problem is that the client believes that if the firm goes bankrupt while the majority of the work and materials he has paid for are still in the workshop, then the receiver will consider them part of the assets of the firm, sell them off and distribute the money to all the creditors.

It's really not very likely at all to happen but it's what the customer believes, so is an objection that needs to be overcome. I will be advising them to pursue the credit card option as although it will cost them the commission it will probably be the least expensive way of putting the client's mind at rest.

[Nuisance_Value]

MOTORVATOR said:

If they are a bona fide company, get their bank to provide a performance bond effectively insuring the client against non performance.

http://www.zurich.co.uk/gsg/productsandservices/pr...

It is the norm for the client to pick up cost of said bond or at least for the supplier to have included for it in their quote to begin with having been asked.

This. Construction performance bonds are not uncommon, for example, when a subcontractor requests a large percentage up front the client would ask for a bond against the value before goods are delivered to site. For £30k I would think you it would cost around £500 (almost did one a couple of months ago and it was around £1200 for £116k value)

[mattdaniels]

singlecoil said:

mattdaniels said:

I'm possibly having a brain fart here, but why does the customer have any credit risk? He's paying staged payments for completed works, so if the guys were to go bankrupt mid-stage he keeps what he's paid for and hasn't lost any money, he just has the inconvenience of getting someone else to finish the job?

AIUI the problem is that the client believes that if the firm goes bankrupt while the majority of the work and materials he has paid for are still in the workshop, then the receiver will consider them part of the assets of the firm, sell them off and distribute the money to all the creditors.

It's really not very likely at all to happen but it's what the customer believes, so is an objection that needs to be overcome. I will be advising them to pursue the credit card option as although it will cost them the commission it will probably be the least expensive way of putting the client's mind at rest.

Ok understood.

I think I am aware of the oak specialists involved here and I can appreciate their condundrum.

If the customer has such concerns, how about structuring the job such that the customer pays for the materials and supplies them to the builders, so the job is on their books as labour only ?