Defend your business against the menace of rogue contractors

Construction is a highly fragmented industry in the UK. Even huge infrastructure projects are often built by many small teams, rather than one large contractor.

Sometimes this means several specialists join forces to create a triumph of design and execution. But there are downsides to this way of working, as Adam Hyde, 36, found out two years ago.

Hyde has worked in construction management for most of his career, with stints for UK building giant ISG as well as the United Nations. He also ran his own construction firm, which helped to build a number of Gordon Ramsay’s restaurants, and in 2015 was managing the build of a new roastery, head office, restaurant and café for a coffee brand.

Hyde began working with an unknown contractor, who seemed like a good fit for the project. “In construction, you sometimes have to take on contractors that you have never worked with before,” says Hyde.

“You do your due diligence as best you can, but because it’s difficult to find hard data on past performance, sometimes you have to take a chance.”

To protect his business, he drew up a contract that specified exactly what materials and resources would be needed for the job, and the new contractor signed on the dotted line. “But suddenly, the guy put in an application for payment that was grossly above what we’d agreed,” he recalls.

“I went back to him and we sat down while I explained the reasons why we wouldn’t pay the new amount. He agreed that his bill wasn’t fair and told me he had some cash-flow issues, which meant he was struggling to source the steel required to start work.”

Hyde agreed to pay £5,000 in advance to pay for the necessary materials. After he’d transferred the money, he waited for the work to begin.

“Shortly after that, we found his guys at the site stripping out the temporary structural supports they’d installed earlier,” he says. “It all happened so fast. We should have called the police, but we didn’t know what to do.”

Without the temporary structures, the new build was dangerously unstable, so Hyde’s first priority was to secure the site. “We found a structural engineer who came immediately to help. He recommended a different contractor who worked through the night to make sure it was safe.”

Disaster averted, Hyde tried to contact the original contractor to find out what was going on. “But he’d disappeared,” reveals Hyde. “We also then found out that he’d been involved in previous companies that had gone belly up, so the chances of recouping the financial loss were slim. I couldn’t believe that he had sat across from me, shaken my hand, then took the money. It was a real lesson.”

In total, the fiasco cost Hyde close to £7,000, but he says the stress and distraction of trying to pursue the contractor would have been far worse. “There was no certainty that we could recover the money,” he says.

“We could have taken him to court, and the contract was iron-clad, but even if we saved on legal costs by representing ourselves, the time spent preparing the argument would have been a huge distraction.”

A good insurance company can help entrepreneurs in such situations. “Sometimes a contract isn’t enough to protect you against wrongdoing,” says Megan Jones, trades underwriter from Hiscox, which offers specialised products for construction firms and a wide range of contractors.

“These kinds of issues can be a distraction from running the business, and a good insurer can help with dispute resolution as well as providing financial assistance.” Don’t be fooled by a handshake, she adds: “Remember that if your supplier fails you, you’re in the firing line. Your client will expect you to cover the loss.”

Luckily for Hyde, the coffee business agreed to absorb the costs incurred by the rogue contractor and the build was completed on time. “We were a small business, so had we needed to absorb that full amount it would have been very bad,” he admits.

However, the experience did have one positive outcome. It gave Hyde the idea for a new business, which would provide software to management contractors and projects.

Crucially, he explains, it allows project managers like him to see risks, weigh up the efficiency of different teams and place contractors on projects after they have previously worked well together.

“We launched Keepsite in March 2016,” says Hyde. “This software holds the kind of data that would prevent opportunistic, unscrupulous contractors from targeting businesses like mine. They only get away with it because the industry is so fragmented. So some good came of that rogue contractor after all.”

Content on this page is paid for and provided by Hiscox, sponsor of the Adventures in Business hub on the Guardian Small Business Network.