At our recent Procurement Matters event, we discussed how to manage the risk of supplier insolvency and ensure the resilience of supply chains, topics of considerable importance in the current economic climate.
Contracting authorities are undertaking increasingly robust due diligence on potential suppliers, particularly through the application of selection criteria related to economic and financial standing. The criteria which can be applied are limited by the procurement regulations and must always be proportionate and relevant to the contract in question. Contracting authorities must also consider their obligation to encourage SMEs and third sector organisations. And must ensure that they only ask for information which they will actually consider and have appropriate personnel on hand to evaluate the financial information received.
As well as assessing the financial health of the main supplier or contractor, contracting authorities require to consider what criteria they will apply to significant sub-contractors and consortium members, where relevant.
Contracting authorities are also advised to ensure they have appropriate contractual provisions in place with the successful tenderer to mitigate against the risk of supplier insolvency. These may include an “early warning” system, obliging suppliers to report regularly on their financial health; robust step-in rights to ensure projects are completed in the event of supplier insolvency; appropriate termination rights; guarantees from a parent company or another group company or a third party bond, where appropriate; appropriate payment terms including payment in arrears rather than advance and an obligation to promptly pay sub-contractors; and vesting certificates/ retention of title provisions where materials or goods are paid for upfront/ prior to delivery.
Contracts should also include mechanisms for dealing with price increases. These should set out the particular circumstances in which prices can be increased as well as a specific mechanism for agreeing such increases. Failure to do so could result in any price increase being prohibited by the procurement rules unless such modification falls within one of the other limited categories of modification explicitly permitted by the rules.
We also looked at the Procurement Bill currently going through Parliament; the impact of the recent Subsidy Control Act on procurement activities; and a couple of recent procurement cases which considered the importance of seeking timely clarification from tenderers and ensuring equal treatment of tenderers.
If you have any queries about these issues or any other procurement questions, please get in touch.
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