'Supplier squeeze' in the current economic climate is not something public authorities can ignore. Although spending in the public sector may be helping to bolster the economy, no public sector supplier is immune to the challenges of the recession, including reduced profitability, cash flow pressure and lending restrictions. This in turn directly impacts service provision, with knock-on effects to customers, including:
So how can you manage this potential problem?
Traditionally, the financial health of your supplier has only ever been relevant (from a contractual perspective) at the beginning and the end of the contract i.e. you undertake diligence prior to awarding the contract, and terminate in the event that the supplier becomes insolvent. In reality you are likely to have suffered many performance issues prior to your supplier becoming insolvent, with serious consequences for your organisation. You therefore need to consider what other contractual options you may want to rely on in the event that things start to go wrong.
There are a number of issues you should consider for your contract, including:-
A final thought
Ultimately you can't predict when the contract is signed whether your supplier may face financial problems in the future. Even the most reputable supplier or sub-contractor can find itself in difficulty in today's climate. However, contractual ground rules that set out each party's respective obligations if the worst does happen can help everyone manage the services efficiently, even in the worst of circumstances. They may also keep working relationships from becoming too frayed - this always helps if your supplier survives the distress event and the contract continues on with some time yet to run!
Finally, if the worst looks likely, having access to regular detailed information on your supplier's financial wellbeing, should help you identify more accurately and at an earlier stage in the process, the point at which you may need to start putting contingency arrangements in place.