The High Cost of Counterparty Insolvency: Real World Example

The following real-world example, obtained by Fiable, sheds light on why financially assessing companies is crucial in the current climate.

A $110 million head contract for a residential apartment project was severely impacted by the insolvency of the subcontractor responsible for formwork, a $16 million contract that was on the critical path of the project.

The subcontractor’s failure caused multiple delays and triggered a range of costs that quickly escalated. The program delay led to liquidated damages of $300,000 for a 5-day delay, calculated at $60,000 per calendar day.

Additionally, the head contractor had to bear the cost of 14 extra days for preliminary expenses, adding $700,000 to the total. The insolvency also triggered administrator concerns, leading to $40,000 in administrative costs and decisions surrounding the supplier's liquidation.

To keep the project moving, the establishment of a new Special Purpose Vehicle (SPV) was necessary, costing an additional $16,000 for administrative and trust fund management.

The financial burden didn’t stop there. The head contractor was forced to cover past debts for the failed subcontractor, including unpaid salaries and entitlements, which totaled $1 million.

Furthermore, the head contractor had to provide warranties for the failed subcontractor’s work, costing $100,000, and rectify defects in the subcontractor’s work, which added $500,000 in additional expenses.

To complete the project, a new subcontractor had to be found in an uncompetitive environment, leading to a 15-20% increase in the cost of the remaining scope, or an additional $1.6 million.

The total cost of the failure amounted to $4,256,000.

With the original project margin being 3% of $110 million, or $3.3 million, the insolvency of this single critical subcontractor wiped out the project’s margin, resulting in a loss of $956,000.

This represents a 128.97% reduction in the original margin.

If there's one lesson to be learned, it's that a robust financial assessment process isn't just a formality–it's a critical safeguard. By thoroughly vetting subcontractors, suppliers or vendors, any company can reduce the risk of devastating project disruptions and ensure its bottom line remains protected.

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Where to Next?

Financial assessments are a cornerstone of prudent business practice, especially in high-stakes industries like construction, infrastructure, and government contracting where financial risk must be managed carefully. We’ve seen that a financial assessment provides an essential financial overview of a company or subcontractor – evaluating its financial viability through quantitative analysis of accounts and qualitative judgment of management and operations. 

To be truly effective, these assessments should go beyond one-time checklists. They need to adapt to continuous monitoring, leverage modern tools for timely insights, and include a wide lens that captures both the hard numbers and the softer signals of financial health.

For a deeper analysis of your contractor’s financials, Fiable is your go-to premium financial viability solution. We provide financial assessments within 1-2 business days and a range of tools and support for solid financial risk management.

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