The collapse of Carillion highlighted the importance of getting Contractor Insolvency cover in place to mitigate the risk of financial loss to developers and investors if a contractor becomes insolvent.
Recently, another contractor, – Create Construction went into administration in October last year whilst owing £12 million to various suppliers and issuing 50 job losses.
Despite a turnover of £93m in the year up to February 2020 during which time the company had a third increase in revenue, it’s year-on-year pre-tax profit remained flat at around £4.4m. The increase in revenue was due to Create rapidly expanding into new markets from their North West market into the National Market.
RSM Restructuring Advisory released an administrator’s report stating that “Management’s lack of experience and knowledge of subcontractor expertise in the national sector led to the company paying a premium price for subcontractor services, which in turn caused the company’s profit margin to fall.”
After forming in 2006, Create Construction specialised in the areas of student accommodation, hotels and the private rental markets but suffered several setbacks and issues including the effects from COVID. Lockdowns, the hike in labour costs and materials as well as shortages and the reverse VAT charge presented challenges and pressure on cashflow which ultimately contributed to the company’s demise. In the year up to the end of February 2021, the company’s revenue had fallen to just £42.8m and it made a pre-tax loss of £772,000.
At the time of filing for administration, the company had been threatened with legal action from around 20 suppliers and RSM estimated that they owed 303 creditors, many of which were small suppliers and contractors for a total of £12m.
Lloyds Bank are one of the preferential creditors who are set to be repaid £2.85m, but the remaining creditors may lose the money owed to them which administrators have identified to be around £10m.
Although Create Construction is now in administration, the company is part of the wider Create Group of companies which continue to trade. One of the projects that was affected by the collapse of Create Construction is the £7m extension of the Hampton by Hilton hotel, but it is set to be picked up and continued by HBH Construction, a previously dormant company of which Create Construction CEO Paul Mathison is a director.
The Developer for this job is also a Create Group company – Create Developments which is 65% owned by Matheson and his wife Gill Matheson. RSM as required to get an independent evaluation which was carried out for the move to Create Developments due to the “connected person” issue and was given the go ahead to proceed.
By transferring the contract to HBH construction, administrators have estimated that creditor claims could be reduced by £649,000 and also save 6 jobs. Administration will receive 10% of any profit made on the job (up to a maximum of £25,000).
Many contractors have been affected by the same issues as Create Construction…effects from lockdowns, shortages and price increases for materials and labour which has had a knock-on effect on cashflow. It is now more important than ever to be covered for contractor insolvency.