Implications of a contractor Failure

Implications of Contract Failure Costs –Lost Revenue –Poor Service Delivery –Cost and effort of ongoing risk mitigation –Remedial activity –Contractual Disputes –Contract Variations

Implications of Contract Failure Costs –Retendering Costs – Replacement or alternative suppliers/services –Project Delays –Legal costs –Lost opportunity costs –Sunk costs – starting over

Implications of Contract Failure Other impacts –Impact on stakeholders –Political fallout, –Bad publicity –Warranty –Mission Critical Operations – Continuity –Flow-on effects

Case Studies ContractImpactBackground Speed Cameras Contract value Under $5million  Impact on stakeholders  Political fallout  Lost revenue The organisation involved routinely ran very large tenders, so a contract of this value “got under the radar” as far as doing an appropriate financial check was concerned. It all came to head when the accuracy of the cameras was challenged. As a result they were withdrawn and sent back to the original supplier for recalibration. The company promptly went into liquidation. Result was over $30million in lost revenue in the first month that the cameras were out of operation.

Case Studies ContractImpactBackground Portable Buildings $20million  Retendering Costs  Project Delays  Impact on stakeholders The preferred tenderer was a small but solid company with a strong technical bid. It also had an existing contract with the client. However, to take on the contract, the contractor would have needed to increase its capacity by well over 300% in one year. This raised concerns over its ability to maintain the required cashflow. Our analysts embarked on detailed assessment of the cashflow. As the financial implications of taking on the tender became apparent, the tenderer withdrew its bid. This avoided entering a contract that would have failed and ensured the existing contract remained intact.

Case Studies ContractImpactBackground Solar Hot Water System $20million  Impact on stakeholders  Political fallout  Bad publicity  Poor Service We reviewed the financial position of its 3 preferred tenderers, based on price. There were concerns that there might be capacity issues. A review of the 3 showed that 2 were small local businesses with no capacity to upscale. The third was an international company with undoubted capacity. However the parent company was facing litigation in relation to serious charge of fraud and an engagement with organisation had the potential to cause embarrassment. Financial assessments of the next ranked tenderers also flushed out companies with financial issues.

Case Studies ContractImpactBackground Supply of Granite Under $1million  Impact on stakeholders  Political fallout  Project Delays With the busy Xmas shopping period coming up, there was a deadline to complete the project. A financial assessment showed the lowest bidder with serious cashflow problems having overinvested in capital equipment. Because the deadlines were so important, a higher bid was selected. The importance of that decision was shown when the lowest bidder when into liquidation, just 2 weeks after the contract was awarded. If the bid had been accepted, the supply would have been seriously delayed and the project compromised.

Case Studies ContractImpactBackground Road Construction $20million  Retendering Costs  Project Delays  Legal costs  Political fallout The client was aware of potential cashflow problems, with reports that subcontractors were not being paid. We identified that the contractor had liquidity problems caused by its first ever significant trading loss in 40 years. Further investigation identified the poor credit quality of moneys owed to the contractor from a related party. The bank had offered a nominal loan, but analysis showed this was well short of the requirement. The client chose not to enter the contract. In the event, the contractor went into liquidation and the project, which was federally funded, was saved.

Case Studies ContractImpactBackground Software Installation $30million  Project Delays  Legal costs  Lost opportunity costs  Sunk costs  Impact on stakeholders The provider was heavily dependent on its parent company overseas. The parent was shown to be very marginal with severe risk issues. An aggressive acquisition strategy had left it highly vulnerable. However, the contract was signed because of the unique functionality of the product. Risk mitigation was recommended, but not fully implemented. The supplier’s position, which was being monitored, continued to deteriorate and project implementation was delayed significantly. After 3 years of implementation there was nothing to show for it except a substantial legal bill. This could have been avoided if more attention had been paid to the initial advice.

Case Studies ContractImpactBackground Civil Engineering & Concreting works $24 million  Project Delays  Remedial Action  Legal Action A fairly basic check on a preferred tenderer, (lowest price bid), failed to raise serious questions relating to the tenderer’s capacity to take on the job. The job had to be completed within 40 weeks and the contract was several times larger than the contractor’s previous year’s revenue. If a proper analysis of the finances had been undertaken, it would have identified cashflow issues. The organisation decided to proceed with the contract, with the security of a $1miilion bank guarantee. On completion of the job, an independent inspection showed serious faults in the work requiring remedial action. The cost was estimated at $5million plus. The likely success of legal action was not considered very high and was more likely to send the contractor into liquidation. We were belatedly asked to investigate, but by then it was too late.

When to Determine Contractor Risk Consider Size & Dollar Value Consider Risk Profile

When to Determine Contractor Risk Risk Profile: Term, Complexity Scope of contract Tendering Costs Difficulty and costs of retendering or finding alternate suppliers Political Profile Implications of failure or poor service delivery Costs Other issues

When to Determine Contractor Risk Risk Profile: Potential Sunk Costs, what will be written off if contractor fails Criticality of Service Commitment of Resources / infrastructure Level of funding Impact on key Stakeholders Impact on subcontractors

Assessing Contractor Viability Term, Complexity Scope of contract Tendering Costs Difficulty and costs of retendering Potential Sunk Costs Criticality of Service Commitment of Resources / infrastructure Level of funding Political Profile Impact on key Stakeholders Impact on subcontractors Implications of failure or poor service delivery Costs Other issues Size, Dollar Value HighLow High

Financial Assessments What needs to be determined: Risk of Failure over term of Contract and warranty period Capacity to take on Contract (Sustainable Growth, Other Contract Commitments) Cash flow during term of contract Counterparty Risks Contract Conditions – Risk mitigation strategies & covenants Past Performance issues Match the level of assessment with the contract risk

Implications of a contractor Failure