Due diligence when selecting contractors or subcontractors

[edit] Introduction

The financial failure of a contractor or key supplier can be catastrophic to a project.

To reduce exposure to risks it is important to have a thorough grasp of both the capability and financial status of a prospective organisation before appointing them.

Reliance on credit checks involving accounts filed at Companies House can be useful, as can assessments of past track record, but they have their limitations. It is important to understand where the organisation might be exposed to risks through commitments to, or reliance on, third parties, and how secure and well resourced they are given the size of the proposed contract and their other commitments.

The following issues should be evaluated against the proposed scope of works to be undertaken:

[edit] History

• Track record and appropriate references.
• Audited accounts.
• Tax returns.

[edit] Current position

• Main customers (each expressed as a percentage of total turnover to reveal where there may be significant dependencies).
• Current contracts in progress including project programmes and values (to assess where there may be significant overlaps that would put the organisation under pressure).
• Staff resources and CV’S of senior management.
• Organisation chart.
• Current debt position with debt expiry dates.
• Current direct labour resource, including comparisons with previous years.
• Current subcontractors and suppliers.
• Details of current warrantees, guarantees, encumbrances, liens, performance or on-demand bonds or charges held by third parties.

[edit] Future position

• Pipeline work under tender or negotiation.
• Current unaudited annual accounts in progress.
• Proposed subcontractors and suppliers.

[edit] Legal position

• Litigation, claims and other disputes in progress.
• Ownership of intellectual property, patents, licenses and certification required to carry out the work.
• Insurances in place.
• Partnerships or joint ventures with other organisations.
• Ownership of machinery and facilities required to execute the work.

[edit] Technical capability

• Examination of past or current similar work.
• Competency, qualifications and certificates.
• Subcontractor and supplier capability.
• Building Information Modelling (BIM) capability.
• Overall capacity to undertake the work.
• Disaster planning in the event of a catastrophic occurrence such as fire.

[edit] Other indicators

• The cost of performance bonds.
• Reputation in the insurance market.
• Time taken to pay subcontractors and suppliers.

[edit] Step-by-step guidance on appointing a contractor:

• Traditional contract: tender.
• Design and build: tender.
• Construction management: tender.
• Management contract: tender.
• Public project: tender.

[edit] Related articles on Designing Buildings

• Due diligence.
• Mid-tender interview.
• Pre-tender interview.
• Pre-qualification questionnaire.
• Procurement route.
• Selection criteria.
• The benefits of e-procurement in construction.
• Technical due diligence.
• Tender.
• Tender documentation.
• Tender evaluation.
• Tender price appraisal.
• Types of contractor.