Midland building contractors must better understand their contracts and payment procedures to avoid getting stung in the recession with insolvencies and administrations in the industry on the rise.

The Birmingham office of DLA Piper has warned that an employer's letter of intent may not longer be sufficient guarantee of payment in the current climate and could leave contractors high and dry as they do not guarantee payment.

Typically letters of intent and used as a green light to start work on a new project, but many contain a clause that requires employers to repay a contractor's costs only up to a specified maximum amount.

Nationally, liquidations and administrations across the construction industry rose rapidly in the first quarter of 2009, with a 140 per cent increase in receiverships and an 87 per cent increase in creditors' voluntary liquidations compared to the same period last year.

Robert Norris, construction and engineering partner at DLA Piper's Birmingham office, said: "As the economy wades deeper into recession a number of Midland contractors will face financial difficulties. Understanding the way in which the industry and its supporting supply chains work and the legal framework which surrounds them becomes more important than ever.

"It will become increasingly tempting for contractors to dive into any work for which they are approached to do so straight away.

"But contractors need to think twice before beginning work on new projects on the back of an employer's letter of intent.

"Increasingly, developers are getting out of projects as soon as the funds dry up, leaving contractors with the wasted costs they have already incurred. But unless a formal contract is entered into, rather than just a letter of intent, wasted costs will not be repaid.

"It is paramount that the parties to construction contracts understand the payment provisions in their contracts and how they impact on one another throughout the supply chain.

"So a return to 90 day payment periods, while affording protection to some businesses, will be unsustainable for others."

DLA Piper is an international legal practice with over 3,700 lawyers across 66 offices and 28 countries.  From its offices across Asia, Europe, the Middle East and the United States, legal and business advisers provide a range of services to local, regional and international businesses.