Unless the NSW government scales back government spending on future infrastructure projects, then a feared Australian economic downturn would mostly affect Contractors that rely on private sector income streams as the rate of insolvencies of Contractors in the construction industry will likely increase dramatically.

Insolvencies may be rare but they do occur.  Owners are at significant financial and performance risk, but this risk can be reduced if inadequacies are identified and if mitigation strategies are planned and deployed soon enough.

For instance, owners on existing contracts ought to familiarise themselves with their bonds or bank guarantees to establish whether the terms are adequate in case they are needed to “secure” performance if their contractor becomes, or is likely to become, insolvent.

It would be prudent for Owners or Contractors that are yet to finalise construction contracts to pay particular attention to their securities before the contract is entered into to ensure they are properly protected.

Oftentimes, Owners are too complacent and believe that the bond or guarantee is “as good as cash” but on-demand bonds are not as common as they once were; most bonds or guarantees are now conditional.  Owners should act now to prepare to ensure they fully understand all the preconditions to calling a bond if the need to do so arises.

Conversely, Contractors must be aware of these risks and take steps to ensure Owners are deterred from any temptation to act unreasonably as Contractors do have some right to restrain a call on bank guarantee although the opportunity to do so is very narrow and they must be vigilant to shield themselves properly.

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