Daniel Clarke is a partner in the corporate recovery and insolvency team at Pannone Corporate

Given the current complexity of the construction market and ongoing concerns around economic uncertainty, it’s unsurprising to learn that supply chain security is among contractors’ top concerns for 2023.

“One of the biggest red flags that may indicate trouble brewing with a supplier is a drop in communication”

The good news is that things are on the up. The sector experienced a spike in business activity in February, with supplier delays reported as being at their lowest in three years. Last month’s activity hike broke a two-month period of decline and growth was at its highest since May 2022, according to the latest Purchasing Managers’ Index (PMI) data.

It’s welcome news, but in an industry renowned for its unpredictability, it pays to be prepared – particularly if you’re a business that’s already feeling the effects of disrupted supply chains. The insolvency of a key supplier can have a major impact on a business, so it is important for construction companies to be aware of those risks.

But how do you spot early warning signs of issues in a supply chain and take steps to mitigate potential risks?

A drop in communication

One of the biggest red flags that may indicate trouble brewing with a supplier is a drop in communication – whether sudden or prolonged.

Poor communication can lead to all kinds of problems in supply chain operations, such as stock shortages, incorrect orders, missed shipping dates and an inability to forecast supply chain costs. It’s also usually one of the first indicators that a supplier may be about to go out of business.

The pandemic has reinforced the need to talk to your supply chain partners, so any change in communication can be unnerving and is a surefire way to break down trust, particularly if you have a longstanding relationship with a vendor. Keep a close eye on communication patterns and a paper trail of all liaisons.

Delays with deliveries

Material shortages and escalating costs have crippled the industry in recent years – delivery delays only serve to impact this further. Inconsistent stock levels and deliveries outside of agreed schedules could be another signal that a supplier is in financial distress.

The supply of goods between businesses tends be based on loosely agreed supply terms, often simply incorporating a supplier’s standard terms of sale, which are not necessarily set up to cover long-term supply arrangements – particularly if delays occur. This can leave contractors open to significant financial risk.

Changes in payment terms

When a supplier finds themselves in hot water and is struggling to maintain cashflow, one of their first reactions is to change payment terms or request upfront payment from clients.

Naturally, this will have a knock-on effect on your own cashflow but, if you find yourself desperate for materials, it can be tempting to agree to new terms. Before doing so, consider other ways you can support a supplier, such as committing to longer-term contracts or increasing purchases in future.

How can you protect yourself against supply chain insolvency?

It pays to always keep an eye on alternative suppliers in the market and spread your risk, as opposed to being dependent on one supplier. This will help manage resilience within the supply chain.

Before entering into a contract with a supplier, thoroughly investigate their finances and reputation to identify any operational risk of working with them. Look out for evidence of declining business performance, re-inancing, changing management structures or inconsistencies in the company’s filing history. If their filing history is not up to date, make further enquiries to establish why the accounts have not been filed on time.

Check that your existing supplier contracts provide adequate protection against the effects of insolvency, by identifying your company’s maximum exposure in the event of the other contracting party’s insolvency. Regularly reviewing them will help avoid any uncertainty about what contractual terms apply and, if existing terms become unworkable or unprofitable, companies should seek to renegotiate and amend terms in writing.

If a critical supplier does enter a formal insolvency process, you need to assess the impact and move quickly. Always seek early advice on the implications and, if an exit strategy has not already been put in place, you should review the contracts to identify the best course of action.

If the supplier enters administration, the statutory moratorium will prevent your business from taking legal proceedings against them without the consent of the administrator or permission from the court. However, the moratorium will not necessarily prevent you from enforcing your contractual rights, providing they can be enforced without commencing legal proceedings.

The most common outcome of an administration is the sale of all, or part, of a business to a third party. If the core business is sold and continues to trade, the third-party buyer is likely to want to retain your business moving forward and may, therefore, be open to negotiations about previous incomplete orders and/or terms moving forward.

All businesses are susceptible to risks in the supply chain and, unfortunately, most will come across issues as a result of supplier insolvency at some stage. Dealing with this issue can be a time-consuming and costly process, but with careful planning and regular ongoing supply chain management, those within the construction sector can significantly reduce their exposure to risk.

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