£24bn
Estimated UK bad debt from COVID-19 restrictions
Source: Red Flag Alert financial analysis — with construction cited as the second sector with the largest unpaid debt in 2019.

A financial analysis conducted by Red Flag Alert has estimated that companies in the UK will face a staggering £24 billion of bad debt due to COVID-19 related restrictions. With the construction industry cited as the second sector with the largest unpaid debt in 2019, and cash reserves depleted due to months of lower activity, it is crucial that mitigation measures are put in place to avoid financial failures in the supply chain.

A financial failure in the supply chain may have grave repercussions on projects depending on the criticality of the contractor or supplier. Financial failures can be invisible to clients and may happen at short notice. They may happen to tier 1 contractors, but more often than not they will happen to lower-tier suppliers.

"Financial failures can be invisible to clients and may happen at short notice — and they are most likely to occur at the lower tiers of the supply chain, where visibility is lowest and reserves are thinnest."

Five Recommendations to Reduce Financial Risk

So, what can we put in place to improve financial visibility and reduce the risk of financial failure? The following recommendations may help:

1
Stress test your supply chain. The contractor's financial status may have been checked when the contract was awarded, but COVID-19 may have changed their financial position significantly. Clients should check how tier 1 contractors, and their key suppliers, may cope with different scenarios of revenue drop and increase of bad debt.
2
Review payment terms. Clients may wish to consider improving payment terms in the short term to assist the supply chain with cashflow. The cost of improving payment terms could be negligible in comparison to the cost of a supplier failure.
3
Ensure invoices are paid on time. Following on the previous point, inefficiencies in invoice processing may have a significant impact on the financial stability of the supply chain at a time when every day of cashflow matters.
4
Ensure that tier 1 contractors pay their supply chain on time. Financial failures are most likely to come from lower-tier suppliers. It is imperative that cash flows to all levels of the supply chain. Tier 1 contractors must be held accountable for ensuring that this happens.
5
Establish a transparent and open dialogue with the supply chain. The weeks and months following the easing of restrictions may be very volatile. The financial situation of suppliers may change greatly from one week to the next. It is crucial that an open dialogue is established so projects can be sighted to any evolving risk before it becomes a crisis.

Financial stability in the supply chain is one of the critical issues reported in countries where restrictions have been lifted. Acting early — before a contractor reaches the point of failure — is significantly less costly than managing the consequences of an insolvency mid-project.

"It is imperative that cash flows to all levels of the supply chain. Tier 1 contractors must be held accountable for ensuring that this happens."
Francisco del Rey
Procurement, Contracts and Supply Chain Expert
Great Project Solutions