Recent cases at building service firms highlight a reoccurring issue for the construction industry - the breakdown of financial controls
An industry characterised by capital expenditure projects with long tail contracts suffers more than most during a downturn. Principal contractors are vulnerable to declining asset values and the risk of not being able to shift a completed product and, as a direct consequence, sub-contractors and suppliers fall foul of the under-budget cash flow of their employer.
However, when things do go wrong, the seeds are quite likely to have been sown well before any work commences. It could be over aggressive pricing to win the work in the first place, or, equally as common, a project management and control regime that does not reflect the risks already inherent in the contract.
When things take a turn for the worse, too many managers fall victim to the denial devil - unrealistic assessment of work in progress and reassessment of costs to completion; assuming a principal contractor will renegotiate terms; telling clients, suppliers or lenders what you think they’d like to hear, rather than what they need to know.
When things take a turn for the worse, too many managers fall victim to the denial devil
This inaccuracy in reporting is very rarely about personal gain, but far more likely to be because the situation is misunderstood, or there is a fear of personal or corporate failure that prevents the truth from coming to light until it is too late.
So how do businesses protect themselves against these sorts of risk or mitigate their effects? It starts with internal governance and the robustness of costing and project acceptance procedures. Key questions that should be asked are:
- Who in the business has the authority to commit the company to contracts, to what level and on what basis?
- What is the process of escalation to higher authority, such as a management or board committee?
- What does the costing model look like?
- Are the procedures robust in the first place, are they stuck to rigidly and are they regularly audited?
- What is the process of contract monitoring and control?
This is a crucial point – are the contract controls a case of one size fits all, or do they reflect the potential risks identified at the project acceptance phase? All too often simple checkpoints are over-looked: What have we spent so far? What value has that expenditure created? What has still to be spent and what is the additional value expectation?
If there is virtually no intervention until the impact on cash flow starts, the situation becomes far more difficult to manage.
If change is considered the appropriate course of action, an interim FD should be installed immediately.
When the business realises that inadequate costing controls will materially impact its earnings, management changes can be inevitable, particularly if the company operates in the public environment and change is seen as an indication of decisive corrective action by management.
But great care should be taken - intellectual property can be sacrificed and the support or supplant debate needs to have had a thorough airing before decisions are taken.
If change is considered the appropriate course of action, an interim FD should be installed immediately. The interim FD market is richly populated and will yield one or more suitably experienced and qualified candidates who can hit the ground running.
An interim FD can take immediate control of the situation and, most importantly, start to do the right things, unhindered by the baggage of what has gone before.
the permanent FD is likely to be very different to the one parachuted in to deliver the battlefield solution.
They are not fettered by internal politics and will answer only to the board; similarly, they do not have the burden of any associated embarrassment with circumstances leading up to the breakdown in controls. These skilled executives thrive on the challenge and can provide the business with the solid kick-start it needs to get back on track.
But once back on an even keel, a longer term hire must be made; the individual best equipped to become the permanent FD is likely to be very different to the one parachuted in to deliver the battlefield solution.
Jon Bloor is partner and head of FRP Transition, a division of FRP Advisory LLP, the restructuring, recovery and insolvency firm.