Five steps to mitigating the domino effect of supply chain insolvency

Supply chain insolvency in construction can trigger a wave of disruption and shake up project timelines on a grand scale. The ripple effect can decelerate progress, with repercussions that can impact more than just budgets and timelines.

Contingency planning mitigates the impact of supply chain insolvency and doubles as a lifeline in the event of a supply chain collapse.

As more suppliers inevitably buckle under the weight of soaring fixed costs, financial security in construction remains at arm’s reach. Precautionary action must be taken to shield against supply chain insolvency.

Supply chains serve as the cornerstone of construction projects. Therefore, threats arising from supply chain insolvency can have far-reaching repercussions, such as project delays, cash shortfalls and reputational damage.

The financial risks that stem from supply chain insolvency can be debilitating for construction projects, particularly when substantial funds are involved or a specialist supplier exits the market. When a supplier goes insolvent, any services due are likely to go unfulfilled, prompting the search for an alternative supplier, which takes time and usually additional funding.

A supply chain casualty is both financially demanding and strategically taxing. If funds have been paid and a supplier goes insolvent, they can usually be recovered through the formal insolvency process. However, the smaller the cash pot, the smaller the chances of a payout for creditors with no priority status.

The reputational impact from overrun projects can also be unforgiving for construction managers, which can hamper future opportunities.

Supply chain insolvency is a bitter pill to swallow, albeit avoidable, if ample precautions are taken to soften the blow. The following steps can help mitigate the domino effect of supply chain insolvency

Supplier due diligence is imperative to track the financial health of supply chains and alert to the first sign of financial distress. A combination of publicly available and paid-for data can provide access to a detailed financial assessment of suppliers.

This may include insights into their current credit score, credit limit and creditor action, such as a winding-up petition or county court judgment, which indicate potential insolvency. Some intuitive data intelligence platforms provide a health rating that’s easy to interpret, and which can assist during the supplier selection process.

Whether conducted formally or informally, contingency planning involves brainstorming scenarios that could potentially arise and threaten the smooth running of projects. Each scenario is supported by a real-life response that serves as a resolution.

A contractual agreement attuned to the risk of insolvency goes beyond default terms and conditions. Late payments are synonymous with construction, which underlines the sheer importance of stringent terms and conditions. Cover all bases, including the application of interest on late payments, and engage in responsible payment practices, such as strategic payment reminders and enlisting professional creditor support when required.

A diversified supply chain is integral to spreading risk, particularly in the event of supply chain insolvency. Should a supplier go insolvent, an alternative supplier may be on the books, which can cushion projects from delays and disruption.

While often overlooked, transparent communication can promote open discourse on insolvency, which can signal whether insolvency is fast approaching or a distant concern. This can prompt construction managers to make the necessary preparations to insulate projects from the fallout of supply chain insolvency.

Supply chain insolvency is a growing concern for construction managers during a time when costs are rising across the board. Early mitigation is key to operating sustainably and free of threats arising from supplier insolvency.

Chris Bristow is a business debt help expert at Begbies Traynor.