Want to avoid a situation like the collapse of Carillion? Strong contracting and continuous financial auditing can help mitigate the risk of contractor insolvency.
Speaking to SM in the wake of the collapse of key government contractor Carillion, Jamie Gardner, senior manager at consultancy firm Efficio, said buyers should ensure they have ongoing checks of key suppliers’ finances.
Here are his four top tips:
1. Have the right safeguards in your contract
Joint ventures are a good way to reduce the risk on big contracts, but make sure the partners are all “joint and severally liable” for the delivery of the whole project. “That ultimately ensures the performance of the contract should one of the partners get into difficulty.” Buyers should also include ongoing oversight in their contracts, either through quarterly reviews, visibility of accounts or even regular interviews with supplier CFOs.
2. Ensure there is ongoing scrutiny of your contractors’ finances
Financial vetting often happens extensively during the tendering process but, “once the contract’s awarded the focus is traditionally much more on the project management and delivery of the contract,” said Gardner. Procurement departments should work with their finance teams to use the tools in their contracts throughout a project’s delivery, “not just on the back of profit warnings”.
“If that was being done on a couple of the contracts that Carillion was working with – not just in the public sector but even in the private sector – I think that obviously would have started to raise alarm bells,” he said.
3. Have a contingency plan
If things start to go south, buyers need to know what performace levers they have in place and use them. Start to challenge delivery partners on what steps they are taking to mitigate against the impacts their financial situation might have. Buyers should also consider what steps they are willing to take to ensure a project is delivered: are they willing to pay subcontractors directly, to subdivide the contract or to change their scheduling or payment terms?
“I don’t think there’s a template, because every project and contract will have its unique characteristics, but they can start to glue the contingency plan in rather than – as happens now – it goes bang and they’re left with no choice but to try find other solutions,” said Gardner.
4. Keep an eye on the market
Buyers need to be aware of capacity and pinch points in their supply chains in the event their business needs to find new suppliers to step into a contract. “That’s just good procurement: having buyers have their fingers on the pulse of the marketplace, understanding whose around if they need to get somebody potentially quickly,” said Gardner.
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