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Procurement - playing it safe
1 April 2009
Every Fire Authority has a statutory duty to ensure that the
procurement of supplies, works and services represents the most
cost-effective solution and that best value for money has been
achieved. So in these troubled times how does the smart Fire
Authority set about protecting itself when procuring works and
services? Whilst there are no guarantees Shaun Tame, Construction
Partner at Browne Jacobson LLP, outlines ten steps which can help
to reduce the risk of the credit crunch derailing a project.
Conduct financial due diligence
This is crucial and should include due diligence exercises on
sub-contractors as well. Make the supply of necessary financial
information from tenderers a prerequisite. Take up financial
references, speak to the referees and satisfy yourself that the
contractor is financially sound. Authorities are perfectly entitled
to make the financial position of a company something which you
will take into account when evaluating and scoring tenders – you
just need to be quite clear that you are doing so. Consider making
it a term of the tender that the contractor has to produce similar
information in respect of the proposed supply chain.
Take up references
Make it a term of the Invitation to Tender and the scoring
mechanism that satisfactory references are obtained from recent
clients.
Allow contractors and consultants to make a
profit
Organisations need to make a profit to survive and clients
aren’t doing themselves any favours by driving suppliers into the
ground. The risk of going with the cheapest price is that the
contractor doesn’t resource the project properly, quality suffers,
extras are claimed at every opportunity and a claims mentality
develops.
Worst of all, the cheapest contractor goes bust or fails to pay
its suppliers and they either go bust or refuse to do the work.
Either way, the negative consequences are likely to far outweigh
the monetary benefits achieved by the saving in price.
Obtain parent company guarantees and bonds
A parent company guarantee won’t cover every eventuality but at
least it protects the client against a situation where a subsidiary
folds. A bond will cost money to procure – and it is usually only
for 10% of the contract sum, but if it does have to be called on
then depending on timing and the nature of the default it could
very well provide a useful level of recompense. Make sure that the
bond allows recovery in the event of insolvency and that it doesn’t
expire until the issue of the certificate of making good
defects.
Open a project bank account
While this may not be appropriate in all cases it is a
possibility and one envisaged by the latest edition of one form of
partnering contract – PPC 2000. The bank account run jointly by the
employer and the main contractor will ensure that payments to the
supply chain are being made when they should be made and that the
contractor is neither sitting on monies when he should be paying
thereby causing problems down the line – and so that if he goes
bust he doesn’t take monies which should have been paid to the
supply chain with him.
Sign contracts and obtain bonds and
guarantees
Ensure that the contracts are actually signed and that bonds and
guarantees are obtained. If they are not and the contractor or
supplier goes bust or fails to deliver then you will not have the
benefits which these contracts can offer.
Be a responsible client
Don’t be a soft touch but pay what is properly due when it is
due. Don’t cause pressure on those involved on the job by paying
late. Another aspect to this is running the tender process by the
book and on time.
Get involved and manage actively
That way you should get early warning if there are problems and
be better placed to resolve them or act appropriately. Also ensure
that there is an early warning mechanism in the contract. In
practical terms this might be achieved by being around the site
regularly, having frequent informal and formal meetings and
speaking to people. Monitor progress, make sure that what should be
done is being done – ask questions and get answers.
Set aside off site materials and obtain vesting
certificates
If you are paying for off site materials or equipment then
ensure that you obtain a vesting certificate from the manufacturer
or original supplier and make sure that in your agreement with your
contractor you are only obliged to pay for the goods once this is
produced.
Insist on step-in clauses
Obtain sub-contractor collateral warranties which contain
step-in clauses so as to enable you to step into sub-contracts and
finish the works if the main contractor fails.
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