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A Game of Risk: Deconstructing a construction giant

Since the economic collapse in 2008, (and apart from Brexit of course,) fewer news stories have rocked the construction world than Carillion declaring bankruptcy earlier this year. 20,000 jobs, thousands of subcontractor businesses and a large number of high-profile projects were immediately put at risk.

Two months on, and three public inquiries later, a range of catalysts have been unearthed to explain the implosion – from problem projects and disputes, to mismanagement at a senior level.

We focus on three common construction risks and how they can easily be avoided.

1. Tight margins and low tendering

Telling a main contractor that they’re running the gauntlet by tendering low is like telling a gambler that the house always wins.

Securing future work is imperative; if they think they’re capable of delivering timely projects for less money than their competitors, with riskier margins, then so be it.

Carillion have cited three major UK projects as the source of cash flow problems. One of them, the Aberdeen bypass, fell behind by nearly 12 months until the contractor was replaced.

Working with tight margins, gives little wiggle room for costly problems and delays. This potentially generates project losses rather than profit, which results in serious cash flow repercussions.

Solution: Better risk management and accurate tendering

A construction company must be able to weigh risk against profit. A snapshot of your business cashflow can prove invaluable in working out how many projects the business can cope with, and at what cost.

The key is having the ability to calculate, predict and mitigate risks – having clear visibility of running project costs against budget is vital, so that you can flag issues, and deal with them immediately.

Payapps recommends:
  • Accurate profit and loss reporting with visibility of supply chain payments across all projects and divisions
  • Accurate data for risk assessment and tendering

2. Poor cashflow visibility

In the end, Carillion had just £29m in the bank but owed over £1bn in debt. Ignoring a series of profit warnings highlighted the lack of accurate financial data within the business.

The company resorted to 126-day payment terms with some subcontractors – well over the 30 days set out by the Fair payment charter (of which Carillion were a member), owing over £800m in retention.

Increasing efficiency across the application for payment and approval process is essential in ensuring supply chains are paid on time, providing a sustainable cashflow to subcontractors. A 126-day payment term structure creates a level of risk that no supplier should be subject to.

Solution

Business intelligence is key to running a successful multi-billion-pound company. If you’re managing everything from infrastructure, construction, prisons to school dinners, you need to have key critical information at hand at all times – not just for the next AGM meeting. Modern software solutions can provide this information in seconds.

A structured online system for managing the application for payment and approval process provides visibility of cashflow, reduces risk and saves time.

Payapps recommends:
  • Comprehensive cashflow reporting to provide key critical information
  • An improved application and payment notice process, with transparency of your supply chain payment process

3. Disputes

Disputes are a costly and drawn out process that should be avoided. There’s never a true winner, other than the legal teams, and the bad blood can spill over into disaster.

Carillion found themselves embroiled in a number of disputes. The most heavily referenced is their quarrel with Qatari developer Msheireb properties for the Downtown Doha project.

Ex-Chief Executive Richard Howson claims that the company was owed over £200m for the project; Msheireb claim that Carillion’s lack of cash flow caused project delays, and that when they had paid Carillion, the contractor didn’t use this money to pay their supply chain, incurring further charges to the client.

Solution:

Keep your client happy by delivering projects on time and under budget. This is easier said than done, so ensuring you have the most efficient infrastructure in place is a must.

Pay your supply chain on time, choose the best and most reliable subcontractors, keep a clear audit trail of processes (to cover your back) and ensure you have the cashflow to deliver the project.

Payapps recommends:
  • Contract deliverables that set you apart from competitors – Accurate BIM and O&M manuals.
  • Tools which give visibility to your subcontractors – Online payment applications, snagging/defects, BIM. These tools help with project delivery for your internal staff and they provide a clear audit trail in the event of a dispute.
Download our PDF to find out how Zuuse can help avoid construction risk here.

Effective supply chain management is key to the success of a construction project. Strong supplier relationships guarantee the best skilled workforce on the job, ensuring key project deadlines are met. Maintaining strong supply chain relationships makes it easier to choose reliable subcontractors for repeat work.

Time is key to the quantity surveyor. When he or she isn’t out onsite, they’re in the office managing the administration – the paperwork. Invoices, payment applications, insurance documents, tenders – the list goes on.

Managing processes manually using paper and spreadsheet based systems can take up the bulk of time for most commercial teams. When figures don’t add up – internally, or externally with clients and subcontractors – processes get unnecessarily complex and valuable time is inefficiently used.

The commercial team also has the responsibility of ensuring payment practices are Construction Act compliant. Payment terms set out in the subcontractor agreement must be adhered to, with physical payment made by a certain date. Failure to do so opens risk to  severe consequences, commonly resulting in delays, legal disputes and a broken supply chain. The full extent of the damage caused in the aftermath of Carillion’s insolvency and late payment practices – 126-day payment terms to subcontractors – is still yet to manifest, but will likely mean insolvency for some subcontractors, despite the efforts of a £100m government handout.

To recap, the main obstacles facing all quantity surveyors are:

 

  • Manual paper and spreadsheet based systems – One of the most time-consuming areas for quantity surveyors at any size construction company. Margins for error in spreadsheets and different reconciliations of what should be identical documents result in risk and costly overheads.

 

  • Contract and legal compliance – All applications for payment must be submitted on time by subcontractors, payment notices must be issued submitted on time by contractors and payment must be made by the terms set out in the original contract agreement and UK Construction Act.

 

  • Cost estimation, bill of quantities and cost reporting – Ensuring that all information is readily available for key decision making.

 

  • Managing supply chain relationships – Ensuring all suppliers are happy and able to complete their work on time.

 

THE SOLUTION

Payment application software – Payapps

No other software on the market gives full control of the application and approval process, allowing main contractors to choose the format in which subcontractors submit applications for payment. Payapps reminds parties when it is approaching both time to submit and assess, ensuring a more transparent and collaborative process.

This light touch, easy-to-use solution allows the main contractor to easily assess applications including any supporting evidence and to subsequently submit payment notices, rapidly reducing the amount of time it typically takes to manage the application for payment and approval process.

Industry standard PDF applications and payment notices are automatically produced and sent at the click of a button, with the ability to manage and track variations and supporting documentation.

To find out more about Payapps, get in touch with us here.