Carillion aftermath: Can technology help prevent further losses in the construction industry?

Having enough construction projects to keep your teams busy no longer means that you are doing enough to stay in business. 

Using Geopal technology to stay profitable in Construction

How to rethink contract management, tendering and bidding in Construction

Having enough construction projects to keep your teams busy no longer means that you are doing enough to stay in business. The warning signs had been clearly laid out by the Farmer Review, but if Carillion’s demise has taught us anything, it is that the line between paper-thin margins and compulsory liquidation is very fine indeed. Recommendations stemming from the same Review point towards lack of visibility over daily contracts as a crucial challenge companies needed to overcome. 

Put simply, much of the industry does not make enough money or, where money is being made, feel enough confidence it will stay profitable into the future. The consequence is underinvestment in training and development, in innovation, in raising productivity.

Andrew Wolstenholme OBE, Co-chair, Construction Leadership Council

Carillion’s “compulsory liquidation” proves it had already reached a point where there was nothing worth buying. All it had was its contracts, on which the margins were evidently too low to cover its ever-growing liabilities. There was no viable business to sell. There were no meaningful assets.

Matthew Vincent, Financial Times

 

  • Low margins Construction Industry

The erosion of margins across the Construction Industry has been well documented and the figures speak for themselves: between 2007 and 2016, the average profit margin has fallen from 4% to less than 1.8%. This stark reality spells out one of the main difficulties plaguing contractors in the construction industry: the ability to highlight, track and address issues before the overall project financials are hopelessly derailed. As Carillion has shown, with such low operating margins, it doesn’t take much for inefficiency to cause a tragedy.

 

The high price of inflexibility in contract management

Let’s look at the facts and figures of the 4 contracts that bended and brought a construction giant down to its knees:

£350 Royal Liverpool University Hospital: Project got derailed after asbestos and cracks in the new building were detected onsite. 

£350 Midland Metropolitan Hospital: Delays were blamed on “the fitting of pipes and wires [taking] longer than expected”.

Aberdeen Western peripheral route: The schedule slippage was blamed on more predictable problems: cold weather during a Highland winter.

Development project in Doha, Qatar: The big issue was a £200m dispute over money – cash owed on a project linked to preparations for the 2022 Fifa World Cup. Local reports suggest Carillion was not paid for almost a year’s work. 

All these projects were beset by seemingly innocuous problems that caused more and more embarrassing delays and mounting costs. If there is a common thread amongst all of these issues, it is how foreseeable these delays were. It is not simply a matter of having prevention measures in place, it is above all about making allowances for these eventualities and being able to act on them.

While is a buzz now about Digital Transformation, with technology x or z being heralded as the holy grail, but what it boils down to is giving yourself a chance to fail and quickly get back on your feet.

Businesses need to fail fast, fail forwards and make it cost efficient to do so. This means creating agile digital strategies and indeed business plans that can be easily and quickly adapted if a project is not progressing as expected. * The Digital Transformation PACT, Fujitsu

Making technology work for the Construction industry

There are steps which companies can take to safeguard themselves against contract failure. While there is definitely a larger debate taking place on the actual value provided by both Tier 1 and Tiers 2 & 3 subcontractors, for the time being, wafer thin margins are here to stay. So, what can you do to successfully navigate this brave new world?

Take a leaf from the tech guys and adopt an agile mind-set – If the transition, in recent years, from a waterfall to an agile mind-set has taught us anything, it is that no process is above scrutiny. Are your company’s internal procedures working for it or against it? Is there a better, safer, more productive, more profitable way to get the jobs done?

 

Iterate, refine, improve – Once you have been able to pinpoint areas where there is room for improvement, make sure that during the next contract you will be able to tell, on a daily basis, exactly how much money you have made. Continuous improvement is key.

 

Turn data into actionable information – While companies today have no lack of data, more often than not they are still struggling to convert that data into actionable information: data can be scattered across different departments, may still be collected on paper or might be stored in different CRMs or ERPs. What it boils down to in the end is, that data is not producing the added value that it should.

Conclusion

Construction companies are faced with cut throat margins, which means that when a contract is in progress, there is no buffer left. Carillion may just be the most unfortunate example of the complexity involved in managing contracts, but equally a growing number of players are stepping up their game and transitioning successfully to digital contract management. As indicated by independent experts, end to end visibility over contract performance often spells the difference between profitability and loss.

What steps are you taking to future proof your business?

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