Where a key contractor faces financial distress, it has to potential to have a serious impact on the viability of the Project Company. This is particularly true in the construction phase where the key contractor or a related company is also a main equity investor and there are still obligations for equity contributions.
An independent certifier appointed by the parties will often report on the progress of the construction program, and on compliance with the output specifications during construction and sometimes operations. The Procuring Authority should use these reports to look out for early warning signs of insolvency. In addition to the events described above, the following events could be a sign of impending issues:
• Unexplained and impractical re-sequencing of works to maximise cash flow
• Profit warnings on the stock market in the case of publicly listed companies
• Failure to pre-order materials with long lead times
• Failure of other projects where the construction contractor is involved
In some cases the financial distress of the contractor may be caused by the Project Company failing to make required payments due to a contractor. In these circumstances, the Procuring Authority may have a right to step in and remedy the payment default. The Procuring Authority should monitor this type of behaviour to ensure the Project Company is not increasing the project risks. Procuring Authority step-in rights are detailed in Chapter 7 (Default and termination).