Recovery and resolution planning: Living wills in the construction industry

Recovery and resolution planning: Living wills in the construction industry

Resolution planning: Dawn of the living wills

In light of recent economic uncertainty, it is perhaps unsurprising that, despite over two years having passed since the company’s collapse, the spectre of Carillion continues to haunt not only the construction industry but many other businesses involved in government outsourcing arrangements as well.

Once the second largest construction company in the UK, Carillion appeared ‘too big to fail’. Responsible for a number of UK and overseas projects, including over 400 contracts with the public sector, the company appeared to be financially healthy though all was not well behind the scenes. Running up considerable losses on several projects and underbidding on others, it issued a profit warning in July 2017. After failing to obtain a government bailout, Carillion quickly went into compulsory liquidation on 15 January 2018 with liabilities totalling £6.9b. The final cost of the liquidation to the taxpayer is still unknown and will likely remain the case for several more years.

The disruption to critical public services that followed was significant with a lack of “key organisation information” identified by Cabinet Office Minister, David Lidington, as a key contributing factor that slowed the government’s response to resolving the issues that followed. A number of measures were put forward to alleviate these including a need for “greater transparency” and commitments by outsourcing firms to being a “force for good”. Amongst these however one measure stood out in particular– the need for a company to maintain a ‘living will’.

While wills are most commonly associated with individuals, a living will sets out an organisation’s detailed contingency plans to ensure that any integral services it provides are able to continue should the business fail.

This concept of a living will is not a new one, though the term has subtly different meanings depending on the jurisdiction in which it is used. In both Europe and the USA, the term is most commonly associated with recovery and resolution plans which are tied the banking sector rather than public outsourcing. In these circumstances, banks are required to carried out self-assessments of their operation and how these might be continued should they be wound down or need government intervention. It is therefore important to be aware at all times of the context in which the term living wills is used.

In the context of outsourcing arrangements however, a living will is not a simple self-assessment. Often the services provided are critical with a failure to perform them posing a significant risk to infrastructure, public safety or national security. It is therefore vital that information is shared clearly between the parties with a focus on setting out all information which the employer might need should the contract be brought to a sudden, untimely end. While the information contained within the document will vary depending on the services provided, common points that will need to be addressed include:

  • Company Information and Data – ensuring regular systems and data access are maintained (and backed-up) is vital, as is ensuring up-to-date personnel and asset records relevant to the services provided.
  • The Company’s Group Structure – in particular, any entities engaged by the company and its internal business model. An employer picking up the document should be able to identify the supplier’s importance, the extent to which they rely on other suppliers in the group and how they might be effected by the contract party’s insolvency.
  • Public Sector or Critical National Infrastructure Contracts – the company will need to share information on it and any other entities’ contracts in order to determine the potential impact on other projects should the business suddenly fail.
  • Insolvency Continuity Plans – this must address how the company intends to maintain immediate and short-term continuity of its services should any major dependencies be interrupted. This may include taking steps to ensure that subcontractors and suppliers down the supply chain receive sufficient funding in order to continue operating. 
  • Exit Plans and Strategy – this should include a means of providing all exit information necessary to the employer to enable a prompt re-procurement or allow for assets to be transferred under the contract in-house or to a new-supplier.

Given a company’s situation can evolve throughout the course of a contract, it is vital that the information contained within the living will is updated regularly (at least annually) and communicated back to the employer. Whatever form it might take however, the living will must fulfil its primary aim of ensuring that, should the business go under, another service provider could take over the project with minimal disruption to the services provided.

Once the living will has been created, the question will remain as to when is best appropriate for the employer to invoke the arrangements agreed between the parties. Like the formation of the living will itself, the circumstances will likely depend on the nature of the project and the services agreed between the parties. There are however some common signs which an employer should be aware of that may indicate that a supplier is experiencing difficulties in fulfilling its services including:

  • reduction in key supplier staff, whether at the company or assigned to the contract;
  • a consistent reduction in service performance levels;
  • a clear lack of investment in new products or services;
  • a reluctance to innovate or collaborate with others providing the services;
  • payment delays to subcontractors or other entities in the company’s structure; and
  • investigations or enforcement actions from regulatory authorities. 

As some of these signs are more obvious than others, it is vital that employers remain alert to these potential red flags arising throughout the course of the contract.

The recent events surrounding COVID-19 highlight the importance of maintaining strong contingency plans in the face of possible disruption to a business and its supply chain. While construction has been identified by the Bank of England as one of the sectors most effected by the pandemic, the fact remains that all businesses remain vulnerable to being unable to fulfil their services or potentially failing. Living wills help to alleviate some of the issues that may follow – but only if both parties involved work closely together to ensure this is the case.

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View profile for Christopher LambChristopher Lamb

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