PVs offer a number of benefits to those in the industry as they have a liability structure and legal status that makes their obligations secure even if the parent company goes bankrupt.
Unfortunately, this same arrangement has been used in some circumstance by developers to hide debt or to remove liability from a project if it doesn’t meet the budget.
Ultimately, this often leads to the liquidation of the SPV, leaving construction companies and contractors working on that location out of pocket, while the parent development company walks away with little recourse.
While the use of SPVs in construction has long been common practice, it is now not unusual for a developer to operate multiple SPVs to cover each site they are developing.
To developers, this is a useful arrangement as funding for each site is then ring-fenced, even where other sites may fail.
This may seem to be a good arrangement for contractors as well, at least at the sites that are successful, as they do not see funding pulled from their project to prop up another location.
Although somewhat rare in practice, some construction companies that are instructed to build for a developer by way of an SPV have struggled to get paid for completed work.
This obviously cases a major cash flow problem, which then leaves the construction company unable to pay their own contractors and suppliers.
With the collapse of a number of big developers and worksites in recent years, it is something that smaller construction firms and contractors need to be aware of before starting any job.
SPVs are coming under increasing scrutiny by the Government in the form of new tax rules and legislation, which demonstrates that this sometimes questionable business practice is facing growing suspicion from authorities.
The key to avoiding a toxic SPV is research. Before taking on any contract, no matter how lucrative or straightforward, it may seem contractors should ask around and do background checks on the business behind the SPV online.
Where they have previously liquidated similar SPVs, it may be best to walk away, or at the very least secure assurances and additional information about the project so you can make a more informed decision. This could prove invaluable and prevent a construction firm being left out of pocket if the SPV collapses.
In cases such as these, it is certainly worth seeking additional expertise from solicitors and other professionals in advance to ensure the contract is watertight.
Once on site, builders should continue to remain cautious and monitor how work is progressing and how payments are being made. If money is late being sent to an account, if the site manager is hesitant paying for materials or expenses or if other contractors are grumbling about the SPV, then it may be time to seek pre-emptive professional advice to ensure you are able to recover any outstanding payments quickly.