Due Diligence – Beware of imposters! – Part Two

In Part 1 of this article, Johnathan shared his experience related to due diligence. In part 2, Jeremiah shares his thoughts on the risks of misrepresentation, the power of anonymous letters and the likelihood of being blacklisted as a result of a due diligence process…

The refurbishment and upgrade of an existing water and sewerage system

Jeremiah, what is your experience with due diligence?

Recently my employer was in the advanced stages of selecting a suitable contractor for the upgrade and refurbishment of an existing water and sewerage system, and was desirous of carrying out a due diligence prior to contract award.

During the tender evaluation process (carried out by a team of six), ULTRA, the lowest priced bidder who had successfully passed the preliminary evaluation stage, had indicated that their company had carried out a number of projects which were similar to the client’s requirement in the tender documents. To confirm this, I was asked to lead a team of three (an Internal Auditor, a Lawyer and myself) to the Horn of Africa and later on to West Africa.

Prior to the commencement of the task, and after consultations with the project implementation unit, my team and I developed appropriate terms of reference for the task. The projects presented by the bidders were all structured according to the standard FIDIC contracting guidelines

We set out to;

1. Ascertain the scope and quality of work which the bidder stated they had undertaken.
2. Ascertain the legality of the contractual relationships involved between the contractor and the beneficiary entities.
3. Ascertain the value of works subcontracted in relation to international best practices and laws governing the construction contracts that were provided by the bidder.
4. Verify the contractor’s compliance to environmental and social safeguards issues as well as their general behavior during the construction period.
5. Obtain official due diligence responses to our requests from the employers visited.

In order to put together a good account of this assignment, it became necessary to visit the project sites with the infrastructure, review the necessary contract documents pertaining to the project references that had been stated by ULTRA, and finally to hold meetings with the project implementation team and scheme operators of the beneficiary employers.

Project reference 1 – The water well field development project

For one of their project references in the Horn of Africa, ULTRA indicated that they were engaged as a subcontractor at an amount of ¥ 8.9m. (approximately 9% of the overall contract sum) to carry out part of the overall construction works (valued at a total sum ¥ 95.7m) for the development of a water well field system. The overall construction works for the well system comprised drilling of boreholes, installation of submersible pumps and associated electrical control units, laying water distribution systems and constructing storage reservoirs.

However, as opposed to following the stipulated contract conditions, the main contractor did not seek the employer’s consent to engage in a subcontract with ULTRA. Fortunately, we found some of the engineers and technicians who were present at the time of the construction works. They informed us that neither ULTRA nor any of their representatives were seen during the implementation of the construction works.

We concluded that the subcontracting agreement presented by ULTRA (which appeared to have been approved by the employer) was null and void.

Project reference 2 – a water supply expansion project

In West Africa, ULTRA claimed to have been awarded part of a ¥ 300m contract under a sub contract with the main contractor. In separate meetings with the head of the project implementation unit and the executive director of the utility, we noticed some inconsistencies in the information shared.

The executive director of the utility mentioned that the subcontract with ULTRA had followed FIDIC subcontracting regulations whereas his subordinate said that the subcontract was not formally sanctioned in accordance with the conditions of contract.

The executive director of the utility mentioned that the subcontract with ULTRA had followed FIDIC subcontracting regulations whereas his subordinate said that the subcontract was not formally sanctioned in accordance with the conditions of the contract.

I was informed by one of my team members that in an earlier letter received by our entity, prior to our departure for the due diligence, the executive director did not mention that the subcontracting procedure had been flouted and yet we imagined he must have consulted his subordinates before sending us an official statement on the matter.

During our tour of the project site, we were not granted access to the contract documents, something which we considered to be very suspicious. We were thus not able to determine beyond reasonable doubt whether ULTRA was actually subcontracted to carry out the construction works as they had stated.

From our analysis, it appeared that the required approvals for subcontracting were not sanctioned by the employer and while carrying out our due diligence at this project site, a representative of ULTRA kept tracking each and every move of ours.

From our analysis, it appeared that the required approvals for subcontracting were not sanctioned by the employer and while carrying out our due diligence at this project site, a representative of ULTRA kept tracking each and every move of ours. 

Even though ULTRA might have carried out the construction works as claimed, the documents they provided in their bid could not be considered as legitimate because there seemed to be some irregularities leading to the award and eventual execution of the construction works.

Lessons learnt

1. At the tender evaluation stage, you should not be fooled by a technical proposal that has been very well prepared. 

   In a recent article (The Contractor’s Technical Proposal); which was published on our website (thebuildersgarage.com), we explained in some detail the process through which a contractor should typically go through to prepare a detailed technical proposal. We also discussed the benefits associated with preparing a good technical proposal.

   From my experience, some contractors who are aware that they do not possess the minimum requirements for contract award, smuggle information into their proposals to disguise their true competence (capability), with the hope of circumventing the scrutiny of the tender evaluation process. This is called misrepresentation.

   As a project manager, you should be aware that this game is played all the time. So, rather than being one of the spectators watching the drama unfold on stage, you should take full control of the “actors” before they get on stage and ruin your plans for a smooth tender evaluation process.

From my experience, some contractors’ who are aware that they do not possess the minimum requirements for contract award, smuggle information into their proposals to disguise their true competence (capability) with the hope of circumventing the scrutiny of the tender evaluation process.

2. Prior to contract award, make an effort to travel to the project sites which the contractors state are ongoing or have been completed.

   Infrastructure which is being built (has already been built up) has a language. Just like a lay man can tell that cracks on a concrete slab are suspicious, you can always tell whether a contractor is doing (did) a good job or not. Therefore, visiting previous (ongoing) projects as part of a due diligence exercise, can tell you a lot about a contractor’s competence.

Just like a lay man can tell that cracks on a concrete slab are suspicious, you can always tell whether a contractor is doing (did) a good job or not.

3. You might think the proceedings of your evaluation process are not known to interested parties, but information has a way of filtering out to a number of interested parties, bidders inclusive.

   In this dot com age, bidders tend to know at what stage the tender process has reached; especially where the value of the contracts to be awarded are considerably of high value. As the tender evaluation process climaxes, you will most likely receive anonymous letters which typically contain information suggesting that the competence of certain bidders is doubtful (as already explained in 1 above) and that some or all of the information they have provided is fake.

   Even if you would like to play the role of the blind man, you should not ignore anonymous letters. Whereas they can potentially distract the evaluation process, giving bidders sufficient time to re-strategise, they can also provide information which could eventually facilitate the due diligence process.

Even if you would like to play the role of the blind man, you should not ignore anonymous letters. Whereas they can potentially distract the evaluation process, giving bidders sufficient time to re-strategise, they can also provide information which could eventually facilitate the due diligence process.

4. Blacklisting certain bidders is always a possibility.

   A thorough due diligence should be able to reveal whether what you have experienced in 1,2 and 3 above was worth the painstaking process of selecting an appropriate contractor.

   The eventual findings of a due diligence process might reveal that certain bidders should be blacklisted. As a project manager, you need to exercise some emotional intelligence and make up your mind on how far you would like to broadcast your findings because you might end up with no bidder.

The eventual findings of a due diligence process will mean that certain bidders will be blacklisted. As a project manager, you need to exercise some emotional intelligence and make up your mind on how far you would like to broadcast your findings because you might end up with no bidder.

Conclusion

About two years ago, I travelled from my native country to visit a project which was being subjected to due diligence. While touring the project sites and interacting with officials from the host entity, it became very clear to me that while carrying out due diligence, you are bound to discover a number of undocumented facts about a company that you are considering to award a contract.

As the facts filter in, you begin to realise that the tender evaluation process will most likely take a much longer period than you had originally anticipated. This is not a good situation to be in but once you have conducted a thorough due diligence and have finally selected a suitable contractor, you will protect yourself from the harsh hand of the law which would otherwise consider you a criminal if you award a lucrative contract to an unsuitable (undeserving) contractor.

© 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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