4 March 2010 | Richard Tinham
Buyers: be on guard. The economic climate may be forcing suppliers to promise more than they can deliver. But there are ways of protecting yourself, Richard Tinham explains
The UK may be beginning its slow climb towards economic recovery, but it appears that struggling contractors have picked up some bad habits during the recession. A recent study has highlighted firms bidding for work beyond their capacity and expertise, building up risk by over-reliance on suppliers and offering unrealistic pricing (news, 7 January). Purchasers should therefore be on guard against the possibility of receiving poor service or dealing with a business in distress.
Most procurements involve an evaluation of the contractor’s financial standing. To do this, purchasers need to identify clearly who they are dealing with. If the contract is to be signed with a subsidiary or special-purpose company, is a guarantee needed from a more substantial member of its group? If your supplier will be subcontracting its duties, would you like to know the identity of subcontractors? Remember, if a contractor is reliant on a particular supplier, that entity stability is just as important.
The next step is to do your homework. If you ask for references, make sure that they are recent and directly comparable to your project. Remember to actually follow them up. Before contracting, create a list of assumptions that you are making about the contractor and the deal. Unless the contractor is required to confirm those points in the contract, your assumptions equate to risk you have borne.
Purchasers buying services are often attracted by the qualities of senior figures, but if the contractor is overstretched, these people are likely to be shared with other customers or involved in pursuing new business. Building an implementation plan into the contract can allow purchasers to specify the attendances of key personnel. Furthermore, you might consider examining, for example, a candidate’s current commitments if there is a capacity concern.
Clauses that place a cap on the liability of suppliers are now ubiquitous. Purchasers should not see these as “boilerplate” but should research and negotiate them as they would the price. Think carefully about how losses may arise, and how large they could be. For many situations, a clause that excludes all consequential damages, or caps liability to the purchase price, will be over-simplistic and unsuitable. However, inappropriate open-ended supplier liability might increase prices unnecessarily.
Contracts for goods sometimes require a large upfront payment, particularly if goods are being made to order. If a manufacturer is over-encumbered with risk and becomes insolvent, the purchaser may stand little chance of recovering either the payment or the goods. This is best tackled with due diligence and negotiating down advance payments. Purchasers may also wish to take advice on complementary methods, such as taking a charge over goods or the company until delivery.
Although the economy may be moving back into growth, the immediate future remains uncertain for us all. By taking a fresh look at risk management, purchasers will be less likely to succumb to the potholes that may line the road to recovery.
Richard Tinham is a commercial partner at Winckworth Sherwood (www.wslaw.co.uk)
