Thought Leadership

How the procurement industry deals with contractors folding

30 November 2023

This year has seen several big names in the construction industry hit financial hardship, and prevailing wisdom suggests that this list is only going to grow longer. Indeed, data from the Insolvency Agency shows a 19% rise in companies going under compared to the previous year, with construction one of the most impacted sectors. As clients look for added protection, frameworks have an important role to play in ensuring their projects can be delivered – even if the worst happens – explains our Development Director, Jonathan Parker.

The list of companies that have sadly had to appoint a liquidator in the past year or so reads like a macabre who’s who of the built environment, and there are a lot of projects that are now facing delays and uncertainty.

As a framework provider, an important part of our role is to mitigate against these impacts, and work to ensure that clients are as protected as they possibly can be.

 

The risk of reaching

Prevention is cheaper than the cure when it comes to dealing with the issues of a contractor folding, so frameworks ensure robust governance and assessment of those that bid for a place in the first instance.

The Public Contract Regulations 2015 are prescriptive in that suppliers need to have a turnover that is twice the mid-point of the lot’s value to be suitable for appointment, but even this guideline level can expose contractors to a less-than-ideal level of risk.

Take for example a contractor with a £50m turnover. They will naturally want to reach and push themselves towards larger jobs, and by these metrics could find themselves on a framework that has the potential to be bringing in jobs of £20m or so. This means that 40% of their turnover is at risk on one single job, which can quite quickly end up with them getting themselves into difficulty.

In Pagabo’s case, we look to work more collaboratively with those wanting to be on our frameworks to really understand their situation and ensure that we aren’t putting either the supplier or the client in harm’s way.

 

Early indicators

However, one of the issues at play is a wider industry problem around delays in financial reporting. While framework providers have visibility of some financial data, current regulations mean that some of the more detailed accounts that are submitted as part of applications can be up to 18 months old. This provides a challenge when it comes to accurately assessing a company’s current financial state.

While this isn’t ideal, it means that it is incumbent on those administering the frameworks to put measures in place to mitigate against the challenges this throws up. Alongside having strong, cross-industry relationships, one of the measures Pagabo takes on this front is to have Days Beyond Terms (DBT) as one of our key KPIs.

Although this relies on gaining data from the supply chain, DBT can act as an early indicator of any cashflow issues for contractors. When you pair this up with monitoring for live issues with platforms like Creditsafe, you can start to have more awareness of potential challenges before they reach crisis point.

 

Everyone’s interest

Even with all these measures in place, the often-rapid pace of change in terms of market conditions means that there will occasionally be unfortunate scenarios where a contractor folds while working on live jobs procured through a framework.

One of the benefits of ongoing framework provider involvement is that they are well placed to support in finding the right partner to complete the project, especially when ongoing support is built into the structure of the framework.

A framework provider delivering ongoing support means that they have “skin in the game”, and it’s as much in their interest as it is the client’s to ensure ailing projects are delivered.

 

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