Due Diligence – Beware of imposters! – Part One

Prior to the award of a public infrastructure contract, an employer is usually required to carry out due diligence as part of the evaluation procedure, leading to the selection of a suitable consultant or contractor.

In this article, we are exceedingly pleased to share with you some cases where due diligence had an impact on the outcome of the tender evaluation process for the selection of a suitable contractor to;

1. construct an electricity transmission and distribution system
2. refurbish and upgrade an existing water and sewerage system.

In order to complement my understanding of the importance of due diligence, I convened two extraordinary meetings with my acquaintances; Jonathan and Jeremiah who volunteered to allow us profile their personal experiences related to this subject. As usual, I hope you will learn something new by the time you have finished reading this article.

1. The construction of an electricity transmission and distribution system.

Jonathan, what is your experience with due diligence?

Cyrus, I have not physically participated in a due diligence myself, but I have constituted due diligence teams which I have sent all over the world. I will share with you my experience on three projects.

Project 1

During the implementation of one of my projects (which had been awarded without a thorough due diligence), a new contract was in the final stages of the tender evaluation process. When it became certain that the new contract would go to the same contractor, a decision was taken by my superiors and I to carry out a more detailed due diligence on the contractor prior to awarding the company another contract. This decision was taken because we had experienced protracted delays by the contractor to commence construction works. The contractor was also failing to effectively manage many of the key construction activities on site.

The new contract was worth approximately £7m. We had serious doubts that the company would be able to handle the new assignment especially since the new project required sufficient expertise working in a densely populated area; prone to theft of construction material and requiring a well-planned execution of the construction activities from start to completion.

In the contract documents for the ongoing contract, the main address for official contractual correspondences between my employer and the contractor had been indicated as Europe. However, when we sent letters to Europe, we received feedback from South Africa. This seemed very suspicious. To find out whether this company had a physical address in Europe, we contacted our embassy in Europe for assistance. They confirmed that the company indeed had a physical address in Europe.

This time around we were not going to take chances. We started preparing to conduct a more detailed due diligence on this contractor.

This time around we were not going to take chances. We started preparing to conduct a more detailed due diligence on this contractor.

We contacted the contractor’s former employer in Europe and scheduled for a due diligence. Surprisingly, the contractor called our office and informed us that they were making VISA arrangements for our due diligence team. This was by all means a conflict of interest. We later on found out that it was the same employer we had contacted who had made contact with the contractor, asking him to make arrangements for our due diligence team to travel to Europe. We conceded defeat.

We contacted the contractor’s former employer in Europe and scheduled for a due diligence . Surprisingly, the contractor called our office and informed us that they were making VISA arrangements for our due diligence team. This was by all means a conflict of interest.

I sanctioned a team of three staff (a civil engineer, electrical engineer and a procurement specialist) to travel to Europe. While there, they visited the contractor’s physical office in Europe and toured some of the projects that the contractor had completed. It turned out that the physical address stated by the contractor was correct. The tour to the previous project sites, revealed that the contractor was more than capable of carrying out the additional construction works which we were planning to contract to them.

We also confirmed that the reason why the South African office was responding to our correspondences is because they (the South African Office) and not the main office in Europe, were charged with the management of projects within our jurisdiction.

Project 2

In another case, our project implementation unit had developed a project to supply electricity to four load centers. The project was valued at approximately £100m.

Prior to award of the contract, I dispatched a team to carry out due diligence in North West Africa. The contractor under due diligence was a South African company which had been contracted to design and build a 500-kilometer-high voltage transmission line.

During the due diligence, we were told that amidst a major language barrier, the contractor performed excellently during the project. We were also informed that the job was their first in North West Africa and that they did their best to ensure that they successfully break into the market.

 Project 3

An employer seeks for our support while carrying out due diligence

Recently, my employer was contacted to provide some information about a company which had expressed interest in carrying out a construction project in Nepal. In their bid, the company had stated that they had participated in the construction of a major project in my native country. Being in the mainstream of execution of projects within my company, I was curious to find out which project was being referred to.

It turns out that the company was misrepresenting its experience. It had even gone ahead to open a one-page website and profiled one of the ongoing projects on my company’s home page albeit with edited details.

It turns out that the company was misrepresenting its experience. It had even gone ahead to open a one-page website and profiled one of the ongoing projects on my company’s home page albeit with edited details.

 

Even though we were armed with all this negative information, we were reluctant to formally respond to the entity in Nepal. Eventually, we responded stating that the said project was not familiar to us although there was a project that was ongoing with similar scope but was yet to be completed. We advised that they exercise caution in case they intend to get into a contract with the company.

Lessons learnt

1. It is very important to visit and confirm beyond reasonable doubt that the physical address stated by a company exists. Some firms are brief case companies. Therefore, mindful of the fact that a physical address can also be temporarily set up in preparation for a due diligence team, one should check whether (i) other occupants (possibly within the same premises) are aware that such an office exists and (ii) that there are signs that the office is used on a day to day basis. This is evident if there are cars bearing the company logo, signs of engraving and normal wear and tear of office equipment.

2. While carrying out the due diligence, a random adjustment of the due diligence itinerary should be explored in order to reduce the level of predictability of the due diligence team.

3. Be mindful of the individuals whom you select to constitute your due diligence teams. Some will simply take this as an opportunity for tourism, some easily get compromised and others by virtue of their seniority may dominate other team member opinions; inevitably biasing the final due diligence report. The due diligence team should preferably comprise individuals who have not taken part in the tender evaluation process.

4. Invaluable information can be obtained from different sources, informally or formally. You are strongly advised to make use of your networks – especially colleagues in the same line of work, who might have better knowledge of a potential contractor. This has the potential to provide you with an unbiased opinion about a company under investigation. Take note that certain employers will not like to put certain information in writing and yet it is usually what is not put in writing that will most likely influence the award decision.

5. When you receive formal responses to requests for information about a company which is under due diligence, take note of who has signed off the letter. It could well be that someone of a very low rank has signed off the letter without authority which can make it contestable.

6. From my own experience, once you have any doubts about a certain contractor during the initial stages of the tender evaluation process, your thoughts are most probably true. A due diligence exercise will in most cases confirm your gut feeling.

Continue to Part Two

©. The Builders’ Garage 2017. Permission to use this article or quotations from it is granted subject to appropriate credit being given to thebuildersgarage.com as the source.

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