Civil Engineering Reference
In-Depth Information
On large projects the management of risk involving a supplier's fi nan-
cial failure may require some kind of performance bond or parent
company guarantee. Crossrail, for example, had a policy of seeking a
parent company guarantee from the global ultimate parent of all its
tenderers, and also established the health of the global ultimate parent
by reviewing and analysing their published accounts from the previous
three years. It is debatable whether or not it is strictly necessary to apply
such rigid checks on large, global, tier 1 suppliers. However, the volatil-
ity of the global economy following the 2008 fi nancial crisis and the
failure of organisations deemed 'too big to fail' has made such risk-
management procedures increasingly necessary.
One of the problems with analysing and checking a company's histori-
cal accounts is that they give historical performance only on an annual
basis at worst, or an interim basis at best. The timing of this informa-
tion for a full year's trading report also depends on the accounting year
of the company. Because of the timing of the programmes' own procure-
ment activity, it could mean that the most recent set of accounts
provide trading fi gures that are more than a year old. However, the eco-
nomic situation in general, and trading conditions facing individual
fi rms in particular, can change in the period of a year. For example,
during the 'credit crunch' fi nancial crisis beginning in 2007 and 2008,
as its name suggests, access to credit facilities to fi nance production
activity became diffi cult to obtain. As a result, organisations looking to
meet their cash-fl ow requirements prior to being paid by customers
could not rely on being able to borrow from the banking system.
To monitor fi nancial aspects of supply chain fi rms, PSE uses third-party
credit ratings agencies to feed up-to-date fi nancial data for all suppliers
that appear on a programme's list of contracted organisations and tender-
ing organisations. There are a number of fi rms in operation offering
similar services, data sources and commercial indicators, including the
fi nancial strength of an organisation and their current or most recent
history for meeting their payment obligations. These services allow the
user to establish alerts that indicate when any of the suppliers being
monitored on a programme breach the parameters that have been set.
Regularly updated fi nancial information on the supply chain, together
with the supplier utilisation model, allows for timely intervention to
mitigate the risk of supplier insolvency. However, these indicators are
of more signifi cance for the critical sub-tiers of the supply chain than
for the large tier 1 contractors.
