Question

“We are about to issue an RFP for a major construction project in our municipality, and there are some indications that one of our historically best contractors might be running into financial difficulty. What can we do to protect ourselves?”

Answer

Unfortunately, even the best contractor can run into financial trouble. Hopefully this is just a temporary issue for them, but of course you must protect your organization, going forward. So here are a couple of possible strategies.

As you prepare the RFx, you should keep this risk in mind and make sure that you have contractual protections to mitigate it. If you are like most organizations, you attach draft terms and conditions or a sample Contract B to the solicitation document, so that is where you should include such provisions. For example, the Contract B terms should include your organization’s right to enter into a contract with another party if a receiver is appointed to manage the affairs of the contractor. This may be in your boilerplate language, but double-check, to ensure that the possibility of financial collapse is covered. If it’s not already included, it would be prudent for you to work with legal counsel, as this is just one possible contract option.

Also consider prequalification for financial stability, as a preventative measure, although that adds another layer to the front end of your process. Alternatively, you may want to structure the RFx with upset scoring or threshold evaluation for financial stability. If the contractor doesn’t meet a certain bar for that criteria (e.g. 40/50), they won’t move ahead in the competition.

This article was originally published in The Legal Edge on April 20, 2016

Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.