The collapse of UK Construction giant Carillion should be regarded as a lesson to the global industry. The well-being of over 20,000 employees, thousands of subcontractor businesses and a large number of high-profile projects was thrown into doubt when the UK government decided not to provide the general contractor with a bail-out.
With a large presence in Canada, this news is a warning to construction giants on this side of the pond that construction risk is a dangerous game with potentially catastrophic results if managed poorly.
Problem projects and disputes, and mismanagement at a senior level have been cited as reasons why the company fell into disrepair.
We focus on three common construction risks for general contractors and how they can easily be avoided.
- Tight margins and low estimating
Telling a general contractor that they’re running the gauntlet by estimating low is like telling a gambler that the house always wins.
Securing future work is imperative; if a contractor believes that they’re capable of delivering timely projects for less money than their competitors, with riskier margins, then so be it.
Working with tight margins gives little wiggle room for costly problems and delays. This potentially generates dangerous losses rather than profit, which results in serious cash flow repercussions.
Solution: Better risk management and accurate estimating
Some project issues are unavoidable, but a snapshot of your cash flow can prove invaluable in working out how many projects the business can cope with at once.
The key is having the ability to calculate, predict and mitigate risks – clear visibility of running project costs against budget is vital, so that you can flag issues, and deal with them immediately.
- Accurate profit and loss reporting with visibility of supply chain payments across all projects and divisions
- Accurate data for risk assessment and estimating
- Poor cash flow visibility
By the end, Carillion had just $41m in the bank but owed over $1.4bn in debt. Uncovered by a public inquiry, board members ignored a series of profit warnings from internal finance staff, highlighting a lack of accurate and trustworthy financial data within the business, and the potential appetite for aggressing accounting.
The company resorted to 126-day payment terms with some subcontractors – increasing risk and decreasing cash flow across their supply chain.
By automating the payment application and approval process, supply chains can be paid on time, helping to drive loyalty and quality workmanship. A 126-payment term structure creates a level of risk that no supplier should be subject to.
Business intelligence is key to running a successful multi-billion-dollar company. If you’re managing everything from infrastructure, construction, prisons to school meal divisions, 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 approval process provides visibility of cashflow, reduces risk and saves time.
- Comprehensive dashboard reporting to provide key critical information
- An improved application and approval process, providing transparency and generating trust across your supply chain, no matter the size of your business.
Adjudication is a detrimental, costly and drawn out process that should be avoided. There’s never a true winner, other than the legal teams. The resulting bad blood can ruin project communication.
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 $282m for the project; Msheireb claim that Carillion’s lack of cash flow caused project delays, and that when they had paid Carillion, the general contractor didn’t use this money to pay their supply chain, incurring further charges to the client.
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 (not always the cheapest), keep a clear audit trail of processes (to cover your back) and ensure you have the cash flow to deliver the project.
- Contract deliverables that set you apart from competitors – Accurate BIM and O&M manuals.
- Tools which give visibility to your subcontractors – Online payment applications, 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.
Book a demo to find out how Payapps can help avoid construction risk here.