Following the collapse of British contracting giant Carillion, Tim Haynes considers some of the practical changes that could help reduce the risk of another contractor getting into the same position.
Much consideration has been given recently to the state of the UK construction market, with its low productivity, low investment and low take up of digital levers that might benefit all stakeholders.
The UK construction market is highly fractured, runs on marginal profits and in the case of many large construction firms, accountable for every financial blip to their shareholders. There are a number of factors at play in the current financial climate that do not help these matters. In a short-term focused world where cash is king, value is often lost. Margins are cut still further to secure work, often predicated on gains from future change. This approach filters down the supply chain putting huge pressure on managing the finances at the cost of creative thinking, trialling and adopting innovation and long-term training of the workforce. This is then underpinned by the cyclical nature of construction that does not countenance long-term investment as companies battle to survive in the here and now.
With the advent of Brexit, perhaps now we can look to our own procurement laws to engineer better outcomes for the industry
Through our experience in dealing with disputes, we believe that a shakeup of the procurement process is needed. The market is characterised by clients awarding projects based upon cost and not value. The cost/quality score is generally not effective as most bidders are able to respond to the client’s list of ‘exam’ questions – the reality is the spread on median quality scores is generally low leaving the winning tender to be awarded on cost. At this stage, there is no way to offset the cost score with the creation of long term value that includes the operation of the new asset. We need a new approach to ensure that only the right partners are chosen, ones that will deliver long-term value to their clients, employees, the public and other stakeholders.
With the advent of Brexit, perhaps now we can look to our own procurement laws to engineer better outcomes for the industry. Making better choices in the procurement phase of projects may go some way to perfecting the situation.
The public sector needs to take a lead in driving for better outcomes for our industry and continue to search for the delicate balance between value-based acquisition models versus short-term profit taking by the construction supply chain
More careful thought needs to be given by clients when assessing the risk of contractor failure, beyond what is perceived as the current and scant financial checks that are undertaken. Broader considerations as to the bidding entity’s wider portfolio of commitments need to be brought into play; surely, we should learn from the mistake of continuing to award Carillion packages of significant national interest despite warning signs.
This may be further improved by the introduction of an independent review process during the tender stage. In the cut and thrust of tendering and contract negotiations, especially on complex projects, either party and sometimes both can make erroneous assumptions or misunderstand their obligations as they both jockey for position.
From our experience, we believe there is great merit in bringing in an independent reviewer to test both parties’ aspirations from the contract process and thus ensure that all principal parties know what they are signing up to. This would tackle at the root the underlying cause of many disputes, delays and overruns with the result of significant financial stress placed on the contract that reduces collaboration, innovation and creativity.
The majority of oil, gas, power and utilities operators retain commercial and contractual advisors throughout the life cycle of the project to ensure they are getting advice on how best to manage contentious issues to avoid escalating costs and the prolongation of projects.
The public sector needs to take a lead in driving for better outcomes for our industry and continue to search for the delicate balance between value-based acquisition models versus short-term profit taking by the construction supply chain.
This requires an openness about costs, greater flexibility in contracts and a shared recognition that each participant – main contractors, subcontractors and suppliers – need to make a reasonable profit to sustain the development of their long-term businesses.
Tim Haynes is partner and head of UK operations at HKA