How IT contractors can employ due diligence – part 2

Following on from Part 1, Sid Home, managing director of Safe Collections, continues his comment and guidance on how IT contractors who engage companies can sniff out the flawed or failing from the financially sound before signing any contracts.

Know your 'Ltd' trivia

The proliferation of limited companies in the IT sector warrants the contractor, regardless of whether they own their own limited company or not, to possess a good working knowledge of a limited company's duties.

If you are dealing with a limited company, you must be sure that you are in possession of the company's registered office address.

Every limited company must have a registered office to which all communication and notices may be addressed. The address of the registered office must be listed on all business, order forms, emails and websites. Whilst the registered office can be situated at the company's trading address, it is very often located at an accountant's or solicitor's office, or sometimes at the home address of one of the directors.

Limited companies can and do (for a variety of reasons) change their registered office. Notice of any change in the situation of a registered office must be given within 14 days to the Registrar of Companies. For purposes of litigation, it is imperative that the contractor possesses the correct address of the current registered office.

Know the nuances of 'Ltd'

Every organisation starting out in business will require time to become established, so be sure to allow some leeway at first. Whilst it can logically be assumed that most concerns will have obtained sufficient funding to ensure their continuance for at least the first three months, it should also be remembered that bills are not necessarily due/paid within this initial 'honeymoon' period.

A notorious danger zone contractors should beware often occurs from the 5th month onwards; during which time a business, such as a client or agency, may struggle to establish a pattern in meeting its commitments. Also relevant, is the fact that small concerns are often tempted to take on tasks exceeding than their capacity, and then often use slow payments to their suppliers as a means of providing them with working finance.

Obviously, the older the business, the better it would seem the indications for it's continued survival and success. However, do remember that similar 'danger zones' are present in the life of every organisation, no matter how established or prestigious-sounding.

If the case of a recently formed limited company, for example, a potential creditor could possibly be deprived of the opportunity of viewing their accounts for up to 22 months (not including any delays, which might occur at the Registry) after the company's formation. Naturally, the older the business, the greater amount of information will be available for its assessment. Resist the temptation, however, to dismiss a company out of hand merely because of its extreme youth, since the latter can often bring with it, a fresh approach to old problems and all the enthusiasm connected with a youthful enterprise.

Information blackout

If contractors want to obtain financial information upon a fairly new company but it transpires that none is available, they can ask for a copy of the management accounts. If no such copy exists, the contractor should seek some form of security for any dealings with that party. This could take the form of:

o A guarantee from one or more of the directors
o A guarantee from the parent company (if there is one)
o A guarantee from the ultimate holding company (if there is one)

Conclusion

Contractors should remember that it is their money, services and reputation at stake. As a result it is in the contractor's interest to employ due diligence, examples of which are outlined in Part 1 & 2 of this guide. Following these steps will increase the chance that client companies, and other commercial entities in your contractual chain, can and will pay you for your goods, services or expertise.