Construction companies face collapse
The legislation of the new law may result in the collapse of construction companies as two tiers will be created; says James MacQueen; advisory partner in the construction and real estate sector for business advisory and accountancy firm BDO. The amendment was a response to the collapse of Mainzeal in 2013; which leaves unsecured creditor debts of at least $112m and subcontractors are the major affected party.
Some construction companies will come out of this stronger and will be preferred partners for property owners and sub-contractors. But the current boom has provided an opportunity for many new constructions companies to set up- and some will not survive due to the change in the law; he adds. Under the new law; developers; construction companies and property owners with projects undergoing are required to make provisions to retention payments. To ensure the required remedial work is completed; sub-contractors' pay is retained after project is finished. The retentions will take up 6-7 per cent of construction companies' total turnover.
The catch is insurers will currently only provide insurance to companies whose financial statements they have reviewed and found satisfactory; in other words; an insurance product for those that don't really need it and no insurance for those that desperately do.
He says. The new law also allows sub-contractors to check the company records to ensure sufficient funds in trust or insurance are in place to keep the tank full. As a result; construction industry is divided into two tiers- those among the top tier are equipped with sufficient financial strength to receive insurance cover; while the second-tiers with scant resources fail to receive protection. A number of construction companies is to fail over the next 12 months and the attrition rate will run higher than the normal drop out rate; MacQueen says.