There are a number of potential contractual options available to contracting authorities where there are concerns about the stability of a supplier, to help mitigate the impact of insolvency.
Treatments should be proportionate to the risk identified and the criticality of the contract, considering the impact on the overall value for money of a contract. Key options include:
• Bonds. Typically provided by independent third parties and provide financial payments in the event of supplier failure. Bonds should be used proportionately as they can be burdensome requirements for lower value contracts and add significant costs that are likely to be reflected in bids. Professional advice should be sought when considering the use of bonds.
• Guarantees. Under a guarantee, another party (such as a parent company) undertakes to fulfil the terms of the contract (a performance guarantee) and/or provide financial payments to the contracting authority (a financial guarantee) if the supplier does not honour the contract.
• Project bank accounts. A ring-fenced bank account from which payments are made directly and simultaneously to all members of a supply chain. As per Cabinet Office payment policy, PBAs are not always suitable, but should be used unless there are compelling reasons not to.