Negotiating With The Principal When Your Builder Goes Broke

If your builder has gone broke and you are part the way through the job, in a lot of instances, the legal options available to you once a liquidator is appointed are very limited because most of the measures needed to be in place before the liquidator was appointed.

To be able to do protect yourself retrospectively is an expensive band aid exercise with lawyers with no guaranteed outcome. It potentially may not even worth doing because there are laws that say that you can't sue a company in liquidation. Of course you should always seek legal advice about your particular circumstances - especially if you have a PPS Registration, an Adjudication Decision in your
favour, a Subcontractor's Charge or a Judgement Debt.

What I want to talk about here is about the commercially savvy things you can do, because although you might not have great legal grounds to get paid, but you might have some leverage to negotiate a payment and terms to complete the job directly with the Principal.

The first thing I recommend you do is sit down with a pen and paper, and someone you trust to reality test your logic, and ask yourself whether you are replaceable. And in order to do that, you should reality test how much commercial leverage you bring to the negotiation.

In negotiation theory leverage is referred to in terms of "Power indicators", and the three power indicators that are most applicable in this situation are:

• Time
• Dependency
• Relationships

Time

Any Principal whose builder has gone broke knows better than anybody that time is money. If you can offer a time advantage in completing the Project, you have some leverage. Particularly if you are hoarding long lead time items, or if you have been paid money upfront to secure equipment or material for a fixed price.

Dependency

Services trades, certification trades and unicorn trades are typically in the best position when it comes to how dependent the Principal is on using you. That is because the Principal cares deeply about continuity of warranties, and certifier sign off. If invasive testing or inspection is required to sign off on the work you have completed to date - congratulations, you're in a good spot.

Unfortunately, labour only or day rates subcontractors finish last in this regard. If you can be replaced at a moment's notice, you may not have the dependency leverage in your back pocket.

Relationships

When a builder goes broke, we often see staff of the building company rush in to be heroes and help the Principal finish the job. The Principal will pay handsomely for this to happen, because the staff of the building company are intimately across all the details of the build.

This means you need to preserve your relationships with the staff of the building company - even though those staff are likely to have been instrumental in you being short paid or not paid for work you are still owed by the builder.

Your relationship with the Principal will also make a huge difference here. If you are a Principal specified subcontractor, you're sitting pretty. But if you don't even know how to contact the Principal, you're going to need to lean on your relationships with the architect, engineers, superintendent, and the remaining people in the builder's camp.

Once you have ascertained how much bargaining power you have, you then need to look do some maths. Look long and hard at the financial viability of you finishing this job.

How do the numbers stack up in each of these scenarios:

• The Principal pays me what the builder owes, but I have to hold my original contract price with the builder, and finish the job;
• The Principal pays me a portion of what the builder owes, and I have to hold my original contract price with the builder, and finish the job.
• The Principal will pay me everything including my retention, and I can negotiate delay costs/increased cost of finishing the job.

Where we see subbies go wrong here, is they jump at a payment of any kind from the Principal out of desperation for not being paid (which is understandable), but then when they face the reality of having to complete the job at a loss they either can't afford to complete at all (and fail) or they spend the next 2 - 5 years working for free to cover debts racked up during that period.

If you do the maths, and in almost every scenario you are subsidising the Principal's job (doing it at a loss), you might consider walking away from negotiating with the Principal and finding more profitable work. As I write this, I absolutely recognise that walking away from a debt might mean financial ruin for your business. But if that is the harsh reality of your situation, you are only prolonging the inevitable, and sending more good money after bad.

The last thing I need to mention is that if you have a Trade Credit Insurance Policy in place when your builder goes broke, your number 1 priority should be keeping that insurer happy, and not doing anything to compromise the insurance policy.

Your yardstick for a payment from the Principal should be measured against what you will be paid out under your insurance policy. You should also speak with your broker to see if your policy covers you for preference payments. If it does, it might be safer and more valuable for you to take a payout under your insurance policy, than to settle with the Principal.

As you can see, there are a lot of moving parts when your builder goes broke. You're in debt recovery mode, you need to find alternative work for your workers, potential annual revenue has just been wiped from your books and you might need to urgently start quoting other work.

If you find yourself in this situation, I will always make time for a free 20 minute triage call with you, to help you through the process.

You can book one of those calls at this link: https://calendly.com/michelle-tricks/free-20-minute-intro-call