Problems with suppliers can completely derail projects. Philip Foster explains how to reduce the risk of choosing troublesome subbies.
In a recent survey undertaken by prequalification service provider Achilles and IFF Research, 48% of companies said they were concerned about the financial failure of suppliers, putting it in the top three risks they had to manage.
The financial failure of a supplier can have catastrophic effects on a contractor’s revenue, reputation, share price and, quite possibly, its own financial survival. There are plenty of examples from the construction sector where building has been halted due to the financial collapse of a supplier. In fact, observations made through the BuildingConfidence accreditation scheme of key subcontractors and suppliers — which Achilles developed — alone indicates that in recent years on average 10 accredited suppliers have gone into administration every three months.
But it’s not just financial risks that are a problem. Issues surrounding the use of illegal labour, which can quickly close a project down, poor health and safety routines and corruption and bribery all cause the kind of headaches no construction manager wants on their site. So what can be done to mitigate the risks?
Financial risks
Having a thorough understanding of all suppliers’ financial stability and controls is imperative. Most financial checks of suppliers by credit organisations tend to rely on historical information, on past accounts filed at Companies House for example, which is then used to provide a credit rating. This has its limitations, and for large contracts the buyer may want to consider more robust scrutiny involving going through the current books.
Achilles is currently trailing a different approach, the Financial Analysis Model (FAM), which is now live in the automotive community and is about to be rolled out in other industries. FAM, designed in conjunction with Deloitte, will underpin Achilles’ existing suite of products to facilitate the exchange of financial performance and control information within established communities of buyers and suppliers. The tool includes historical data, current information provided by the supplier and future projections on financial performance.
By asking suppliers to offer current data on a regular basis, along with projected performance, buyers are in a position to use the analytical tools available to test the veracity of the information and better understand the future dynamics of the supplier’s finances. One such dynamic is the debt on the supplier’s balance sheet — it may not be the amount of debt that is the concern, but rather when the debt facility is due to expire, and whether it will be extended.
There are advantages for the supplier too in supplying more information about current order books. Within FAM there are advisory flags, which are messages that pop-up to suppliers giving them pointers that would enhance the information that they provide.
For instance, in a particular year a supplier may be reliant on five key customers. A flag may advise that “It looks like most of your revenue is based on five key customers — do you want to add some more comments?”
Perhaps the supplier has some further important contracts in the pipeline. A note highlighting this would help improve a supplier’s position with a prospective buyer by creating greater confidence in the supplier’s future financial position.
As well as checking the balance sheet and books, there are other signs to look out for that can indicate that all is not well in the supply chain. For example, your supplier asking for payment quicker than you agreed, or perhaps not paying their own invoices on time.
Business continuity
What happens if disaster strikes? If there’s a flood, or a fire, does the supplier have contingency plans in place? And if the supplier does collapse, do you have a contingency plan in place?
Risks over quality
The association between quality and cost is well known, but it may be surprising how many suppliers still lack sufficient quality controls in their business. Even the existence of an certified quality system is not a guarantee of reduced risk.
Verification of not only the existence of quality controls, but also how they are applied is essential — suppliers that can improve their systems may reduce potential direct high remedial costs for themselves and consequential costs for their clients.
Illegal labour and labour standards
It may be a supplier’s responsibility, and indeed legal liability, to ensure that all its staff are entitled to work in the UK. However, we find that a number of subcontractors don’t adhere to the rules. The consequences of a supplier using illegal labour can be highly damaging to a contractor’s and client’s reputation, not to mention the cost impacts from delays caused by the potential sudden withdrawal of labour by the UK Borders Agency. Adequate checks on suppliers’ labour provision are therefore imperative.
Likewise, for buyers sourcing from emerging markets,can the supplier trace the provenance of the material? Has it been ethically sourced? This is a growing consideration among buyers — no one wants protestors camped outside the site gates because they are using stone mined using child labour.
Bribery and corruption
The Bribery Act introduces a significantly increased emphasis on ethical conduct within companies and within their supply chains. What is the supplier doing to minimise risks associated with this? Does it have a gift register, for example? Do its employees know about the legislation? Does the supplier have a policy on ethics? Is the policy monitored and enforced by senior management? Does the supplier provide its employees with a handbook on dos and don’ts of good behaviour? Are invoices signed off by more than one person?
Philip Foster is construction director at Achilles, operator of the BuildingConfidence supplier accreditation scheme. www.achilles.com/buildingconfidence
