Small Scottish construction firms are being urged by a Glasgow law specialist to ask for stronger guarantees when taking on projects.

In order to better protect cash flow and guard against insolvency, Frazer Wardhaugh of HBJ Gateley in Glasgow has suggested small and medium enterprises (SMEs) should take defensive measures prior to beginning work.

He said: "When a project runs into trouble the first thing that tends to happen is that the various businesses in the contractual chain seek to protect their own position by holding onto their cash for as long as possible - by fair means or foul. This is particularly harmful to SMEs who may not be able to afford to bump along with no money coming in."


Mr Wardhaugh said contractors and sub-contractors should demand greater security from clients and main contractors.

Options to make sure SMEs get paid include using bonds to provide access to funds from a financial organisation or implementing a parent company guarantee to make sure performance of a subsidiary is covered by the business which owns it.

Another possibility is funds being held in escrow, or project bank accounts where the fees are ringfenced specifically to pay contractors.

Gary Mavor of Bibby Financial Services said: "Contractors and sub-contractors often have to work under a variety of industry contracts and securing payment for work completed can be difficult and downright complicated. This can take up significant amount of management time and cost which could be better used driving their business forward."

5000 insolvencies are estimated to have occurred in the UK construction sector in the past two years. Figures from Experian showed 293 building and construction insolvencies in August this year, which was a larger number than any other business sector.

(IT)