What should I do to avoid contracting with a potentially insolvent company?

Question

How useful are the Company's statutory accounts? How do I find out about the Company's current workload and customer base? Should I consider procuring part of the intended scope directly? What performance security measures can i take out?

Tom Spilsted · Answer

1.1 Tender Considerations

1.1.1 Prior to allowing a company to tender there are certain matters that can be reviewed: -

(a) obtain copies of the company's statutory accounts;

(b) obtain copies of audited management accounts, projections and cash flows;

(c) consider the group structure and obtain financial information regarding the company’s group;

(d) look for potential danger signs in the company such as large acquisitions, large projects and high staff turnover;

(e) consider industry sector vulnerability issues; and

(f) consider methods of performance security e.g. a parent company guarantee (PCG), a performance bond, retention, escrow accounts, vesting agreements or clauses. If an advance payment is to be made (e.g. to fund placing of orders) an advance payment bond will be required.

(g) investigate the current workload of the company and whether the project will overload their capabilities.

(h) consider whether the scope of the order is appropriate for the company by reference to previous experience and annual turnover.

(i) consider whether any upfront expenditure on plant and equipment required will put a strain on its cash flow

(j) consider whether there is a significant element of works to be procured from further down the supply chain and whether those involved are part of the same group or at arms length. If the latter, the same checks regarding capability should be carried out.

(k) consider whether the company has any dominant clients (i.e. providing more than 1/3 turnover). If they do, there is a greater risk of financial problems if that client encounters difficulties of their own, and possible sacrifice of performance on this order to keep their major client happy.

(l) try to establish if the company carries credit insurance on their debtors, and to what percentage. If they do, risks of bad debts will be largely mitigated. If they don’t, issues with clients paying on the company’s other projects may end up impacting on ability to perform our contract.

1.1.2 The information can be requested by a Pre-Tender Questionnaire.

1.1.3 Get the information compiled from 1.1.1 analysed by competent independent individuals.

1.1.4 “LINK to relevant company” can provide such review.

1.1.5 A Matrix of the information available should highlight any companies which have problems and should be avoided.

What should I do to avoid contracting with a potentially insolvent company?

Insolvency

Performance-bonds

escrow

contract

Steve Hardy

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