EFFECTS OF INSOLVENCY

EFFECTS OF INSOLVENCY

Construction projects embarked upon by either the private or public sector are meant to improve the general standard of living of the people and enhance economic activities generally. Realization of these is hinged to the frame work of adequate financial capacity of the employer as well as the contractor Burnett R.G (1991).

Burnett R. (1991) opined that insolvency create the following effects:

1. Higher cost of completion of manpower resources.
2. Reduction in employment opportunities.
3. Under-utilization of equipment and plant purchased for the project.
4. Late realization of profit in the project.
5. Lowering the standard of living.
6. Decrease in the tempo of economic activities.

These effects of insolvency (factors) will now be examined in details;

1. Higher Cost of Completion of Capital Projects

Increase in cost of completion is one of the effects (effects of insolvency) associated with the advent of insolvency. Before commencement of any capital project, there must be budgetary processes to regulate the permissive increase in the total cost of the project. These costs might include the cost of protective work, remedial work, and extra professional fees, Burnett R. (1991). All these costs will be aggregated to give the final cost of the project.

2. Wasting in the Utilization of Manpower Resources

Advent of insolvency will require additional utilization of manpower resources which arises from extra works. These include the preparation of new tender document, evaluation of work at the time of insolvency, selection of new contractor etc. The time spent on these can be utilized some where in another project Clough, R. and Sears, G. (1994)..

3. Reduction In employment Opportunities

In a depressed economy, insolvency can result in increase in the number of abandoned projects which in turn leads to reduction in employment opportunities. The participants in such a project will be discharged and the employment of more workers by the contractor will be reduced. The contractor is therefore compelled to lay-off some of his workers for some time until when there will be improvement, Burnett R. (1991).

4. Under-Utilization of Equipment and Plant Purchased for the Project

When there are more contracts of the same nature which need a particular type of equipment or plants, it is a common practice for the contractor to purchase such equipment or plant so that it will be used for such project rather than to hire. In the advent of insolvency which might lead to suspension of the project for certain period or abandonment of the project, such equipment or plant would be under-utilized, Burnett R. (1991).

5. Late Realization of Profit on the Capital Projects

The objective of any investment is to make profit. The realization of this objective depends immensely on the time of completion of the project. In a situation where insolvency occurs during the project execution period, this will result in extension of the construction time provided by the contract. This will have bearing on the starting period of realizing profit on the project, Burnett R. (1991).

6. Lowering the Standard of Living

Since one of the resultant effects of insolvency is abandonment of projects, this may lead to increase in unemployment rate and people would be forced to live below their means.