It is normal practice for a business to carry out financial checks on customers where they are extending credit terms or committing resources to a contract, but how seriously do participants in a construction contract take the risks of failure in their supply chain?

For larger contractors or subcontractors a performance bond or Parent Company Guarantee may be requested, but these are not always sufficient to cover the risk and may involve a lengthy and difficult process to recover the losses incurred, by which time recovery may be irrelevant.

The failure (usually insolvency) of a Main Contractor can cause very serious time and money issues for an Employer particularly if the timing is at the height of construction activity &/or where design is involved.

Equally the failure of a key subcontractor can have dire consequences for a Main Contractor and so it goes for Subcontractors and their sub-subcontractors.

A key subcontractor is not necessarily one with a high value order, it may be a specialist or involve the design and installation of some discreet but critical element of the project. This is where a Contractor may be most exposed. On a small high risk package a 10% bond is not relevant & does not give the contractor any protection at all.

 

What then should an Employer, Contractor or Subcontractor do to try to protect themselves from the risk of supply chain failure?

Firstly it is important to understand that risk is a reality and it is not possible to completely avoid it as 3rd parties are inevitably involved in all projects.

However getting close and staying close to key supply chain partners and being aware of potential issues developing can significantly reduce the risks. Managing work load, preparing contingency arrangements and reducing the impact on your project of a sudden business failure should the worst happen.

At Wellesley we have been helping Employers, Contractors and Subcontractors to manage the risk in their supply chain over the last 6 years.

The assistance we have provided includes carrying out individual commercial reviews of key supply chain partners. This would involve meeting with the Directors of the supplier to understand their business it’s strengths & weaknesses, order book, risks, its own supply chain and any other relevant issues. In our experience suppliers are happy to have the opportunity to explain their business to their customers. We conduct on-going and periodic checks including further meetings with the supplier to maintain a close contact. We have helped organisations set up their own supply chain review process which allows them to manage the risk as part of their internal processes.

If you would like to find out more about how Wellesley can help you to manage and reduce supply chain risk in your business please contract John Harwood at johnharwood@wellesely.uk.com