Feeding stray cats: Should you support a contractor in financial distress?

You know what it’s like to have a hungry stray cat begging at the back door. You try to ignore it. You hope it will go home. But one day you finally give in and feed it. Now that cat is your cat. Forever…

It’s the scenario every contracts manager dreads – the contractor who is one late payment from the edge of insolvency. Do you try to help? Or do you let them go?

Here are some things to consider.

How important are they to your business?

Obviously the more important a contractor is to you, the more likely you are to want to help them recover. They may be delivering a critical path item on your project. They may be important because of the amount of work you give them across your business, or because they have a unique product or service, because they know your business very well, or because they are an important subsidiary of a strategic contractor. They may just be someone you have known and worked with for a long time.

How important are they to your community?

They may be important not for what they do for you, but for what they do for your neighbouring community. They may be a major local employer, or associated with a traditional owner, or they may be the only provider of an essential service in a remote area.

What will happen to you if they fail?

There are a number of possible consequences if a contractor becomes insolvent or ceases trading:

  • Local jobs may be lost.
  • You may lose time and money finding and mobilising an alternative contractor.
  • The loss of an essential local service may impact on your social license to operate (if you are seen to be responsible).
  • You may be in breach of community commitments if your replacement contractor has to come from outside the community.
  • You may lose partially-completed equipment and materials on the contractor’s premises to the liquidators.
  • If the contractor claims you owe them money, the liquidators may pursue you as a debtor.

Was it your fault?

  • How much responsibility do you have for their situation (be honest here)?
  • Did you invest enough effort in pre-qualification?
  • Did you pay them on time?
  • Did you make sure they understood the commercial risk?
  • Did you do enough due diligence in the tender process?
  • Has the environment changed?
  • Have you ignored the warning signs?
  • Did you delay them, or suspend their contract for a while, or deduct large amounts for incorrect invoices?
  • Did you ask for extended trade credit terms?
  • Have you been prompt and reasonable in evaluating claims (within your contractual and statutory obligations)?

Are they likely to recover?

  • How difficult is their situation?
  • Do they just have a short-term cash flow problem that you can fix with prompt payment?
  • Can they refinance, extend their line of credit, or get a cash injection from their parent if you give them a little bit of breathing room?
  • Would they be able to trade out of trouble under administration?
  • Are the administrators someone you can work with, or are they about to go insolvent, with the liquidators at the door?

So the short answer to the question? Do you help them?

Yes. But not forever, and not too much. It’s tough love time.

If the things you did got them into this position, you have a moral obligation to help them recover or at least exit gracefully. Even if you were blameless, if it will hurt you more to let them fail than it will cost you to help them, you should help.

But it has to be within reason. At some point the contractor needs to be able to get back on its feet without ongoing assistance. You have a responsibility to your owners and shareholders to use your company’s money wisely. Which doesn’t mean propping up a fundamentally unsound business.

So your focus should be on short-term, specific interventions that will give the contractor an opportunity to recover on its own. And if you don’t think they are going to recover in the long-term, look for an alternative or bring the service in-house.

Sometimes it’s kinder to take kitty to the shelter.

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