Another Carillion disaster on the cards?

[WHBM]

Know we have a few here who were impacted by Carillion, so here finally is the FRC (the finance regulator) take on it all ... many months later.

https://www.bbc.co.uk/news/business-53307572

I honestly cannot see where they have got the split between "audit" and "accounting/consultancy" from as being the prime issue. Passing opportunities on from one to another seems to be a minor part of the problem. Far more central is the auditors lining up the future AUDIT work, for next year and beyond, as part of their audit. Do it to the client's satisfaction and you get the business next year. Find a range of issues and make the directors uncomfortable, and you don't ...

In any event, doing accountancy work very often comes into the audit anyway. Auditor goes through everything and finds all sorts of issues, better way to do things, etc. That's accounting consultancy work. Likewise they find some records not completed properly. Client didn't know how to do it. Who does know how to do so ? Why, the team from the auditors of course. What they call "preparation of accounts" is a significant part of what they do.

This is what was the issue at Carillion, Interserve (who are now getting out of it), etc. Same auditor for years, close relationship, most important thing managers were measured on back at audit HQ was whether they secured next year's business. How did the FRC (many of whose staff are ex-KPMG, EY, PWC etc) not pick this up.

[jackal]

Kier and Carillion going great guns in the HE league table.

https://www.constructionnews.co.uk/cont ... 6-07-2020/

It does baffle me how contractors can lose money with the ludicrous prices HE pay.

[darkcape]

Kier and Carillion going great guns in the HE league table.

https://www.constructionnews.co.uk/cont ... 6-07-2020/

It does baffle me how contractors can lose money with the ludicrous prices HE pay.

Carillion & Kier were the JV for M20 & M23 Smart Motorways, Balfours were in JV with Carillion for Manchester Smart Motorways and the A14 so the company vehicles would remain registered as such until wound down. It's no surprise Kier is at the top as their revenue on the JV projects basically doubled with no JV partner present to take the other half of the cut.

Not sure on your comment about HE paying ludicrous prices, we all know highways is one of the worst sectors with margins of 2-5% if you're lucky. If you're on target cost/cost plus or open book contracts everything is fairly transparent.

What might seem an excessive cost e.g those NMU bridges on the A14 that added a couple of million to the project still have a cost to the contractor.

And it's also common knowledge that the HE schemes were a minor element of Carillion's troubles - of which the M60/M62 smart motorway and A1 Leeming to Barton were the two with major issues.

[WHBM]

Not sure on your comment about HE paying ludicrous prices, we all know highways is one of the worst sectors with margins of 2-5% if you're lucky.

What might seem an excessive cost e.g those NMU bridges on the A14 that added a couple of million to the project still have a cost to the contractor.

There's margin and there's "margin" in construction project accounting. Give me half an hour with a spreadsheet and I'll show how any project can be nicely profitable, loss-making or in the 2-5% band, depending on who you are speaking to. I think there are a couple of others on here who know how to do this as well ...

Given the risks involved, 2% margin is not worth getting out of bed to tender for. And yet major international contractors will fight about getting the job.

If you're on target cost/cost plus or open book contracts everything is fairly transparent.

Maybe start with retrospective supplier rebates, assessed by company/group volume, not contract, level. And 1,001 other ways.

[jackal]

Kier and Carillion going great guns in the HE league table.

https://www.constructionnews.co.uk/cont ... 6-07-2020/

It does baffle me how contractors can lose money with the ludicrous prices HE pay.

Not sure on your comment about HE paying ludicrous prices, we all know highways is one of the worst sectors with margins of 2-5% if you're lucky. If you're on target cost/cost plus or open book contracts everything is fairly transparent.

What might seem an excessive cost e.g those NMU bridges on the A14 that added a couple of million to the project still have a cost to the contractor.

I'm not the only one that's noticed that regular prices of £50m for a mile of D2 in easy terrain is a bit much. Compare to prices 25 years ago when they paid ~£5m per mile (viewtopic.php?f=1&t=12154&hilit=1994).

If the increase had been in line with inflation it would cost only £10m per mile today (average 2.8% over the period - https://www.bankofengland.co.uk/monetar ... calculator). That's more like what most other developed countries pay (see, e.g., https://www.skyscrapercity.com/threads/ ... -168812368).

Supposing for the sake of argument that it isn't just clever accounting and really does cost that much, there's still a valid question of what's gone so wrong in the last couple of decades. It isn't labour costs (comparable to other countries) or land costs (<5% of total). A lazy answer would be 'elf and safety. I'd love to hear a better one.

[Fenlander]

On the pricing thing, Lincolnshire County Council keep saying this junction (which was built to their spec from scratch, they've not inherited it) can be fixed by a roundabout and the figure they keep quoting is steadily rising, last I saw it was above £4million. Instead they're knocking other plans around (ie cheaper ones) including do nothing, cone off some/all of the turnings & reduce the already SPECS enforced speed limit.

[darkcape]

Supposing for the sake of argument that it isn't just clever accounting and really does cost that much, there's still a valid question of what's gone so wrong in the last couple of decades. It isn't labour costs (comparable to other countries) or land costs (<5% of total). A lazy answer would be 'elf and safety. I'd love to hear a better one.

Increase in standards & regulations - stricter designs, stricter tolerances, much more scrutiny of design changes & assessments, obviously far more archaeological, ground investigation, ecology/site clearance requirements, materials & labour are continually increasing, construction generally being a very inefficient and wasteful process...25 years ago isn't harking back to 1960s, but in my short time in the industry (7-years) each Highways England scheme I'm on has more and more requirements.

There's margin and there's "margin" in construction project accounting. Give me half an hour with a spreadsheet and I'll show how any project can be nicely profitable, loss-making or in the 2-5% band, depending on who you are speaking to. I think there are a couple of others on here who know how to do this as well ...

Given the risks involved, 2% margin is not worth getting out of bed to tender for. And yet major international contractors will fight about getting the job.

Yep completely agree. But generally-speaking, projects are bid on low margins or even loss-making and some rely on change events to claw it back. There's not much room for error, a handful of mistakes or failure for a claim to be accepted by the Client (even if it's their responsibility) and whatever decent profit you were making dwindles away to nothing. My point is that a) I don't think HE overpaying on everything, and b) it's quite easy to lose money on the contracts if things go wrong.

In this case as I said earlier a few tricky projects with HE weren't a major factor in Carillion going down - AWPR, The Midland Met & Liverpool Hospitals were the problem sites (and then of course a whole load of accounting & management issues behind the scenes).

[RichardA35]

Kier and Carillion going great guns in the HE league table.

https://www.constructionnews.co.uk/cont ... 6-07-2020/

It does baffle me how contractors can lose money with the ludicrous prices HE pay.

Not sure on your comment about HE paying ludicrous prices, we all know highways is one of the worst sectors with margins of 2-5% if you're lucky. If you're on target cost/cost plus or open book contracts everything is fairly transparent.

What might seem an excessive cost e.g those NMU bridges on the A14 that added a couple of million to the project still have a cost to the contractor.

I'm not the only one that's noticed that regular prices of £50m for a mile of D2 in easy terrain is a bit much. Compare to prices 25 years ago when they paid ~£5m per mile (viewtopic.php?f=1&t=12154&hilit=1994).

If the increase had been in line with inflation it would cost only £10m per mile today (average 2.8% over the period - https://www.bankofengland.co.uk/monetar ... calculator). That's more like what most other developed countries pay (see, e.g., https://www.skyscrapercity.com/threads/ ... -168812368).

Supposing for the sake of argument that it isn't just clever accounting and really does cost that much, there's still a valid question of what's gone so wrong in the last couple of decades. It isn't labour costs (comparable to other countries) or land costs (<5% of total). A lazy answer would be 'elf and safety. I'd love to hear a better one.

However the quoted prices are the declared scheme estimates which back in those days were purely the tender estimates without any uplift to the actual outturn cost as a result of change which was managed as a Client risk or any other risk transfer (utilities or ground). Hence the drive to package up projects into D & B or DBFO schemes.
In the "good old days" tender values of schemes I was on of £26.5M translated to an outturn of £45M or another of £30M moved to £50M. The costs quoted there are rather light on the actual cost

[WHBM]

In the "good old days" tender values of schemes I was on of £26.5M translated to an outturn of £45M or another of £30M moved to £50M. The costs quoted there are rather light on the actual cost

Quite so, although that's just on the costs side. The Treasury (who ultimately pay the bill) have long had an internal formula for how much they expect major projects to actually cost overrun compared to the initial contract sum - uplifts of 70%, or even over 100%, are not unknown in their expectations. The Treasury term is "Optimism Bias", that is those letting the contract are unrealistically optimistic about how little it will cost.

I understand that in the past generation railway industry civil engineering project costs have skyrocketed even more than highways. Note how many mainstream roads/civils contractors are now into rail.

This does not however impact directly on why Carillion (or others) went under. For me a principal impact is looking to expand the business unnecessarily by buying up other organisations with borrowed money, which has to be paid back, with interest, and which if things don't work out perfectly as planned end up sucking all the cash surplus, and then some, out of an organisation. Nothing directly to do with contract margins. I've certainly had to deal with contractors reporting profitability every month until they go bust.

[Herned]

Increase in standards & regulations - stricter designs, stricter tolerances, much more scrutiny of design changes & assessments, obviously far more archaeological, ground investigation, ecology/site clearance requirements, materials & labour are continually increasing, construction generally being a very inefficient and wasteful process...25 years ago isn't harking back to 1960s, but in my short time in the industry (7-years) each Highways England scheme I'm on has more and more requirements.

But why have those costs been so dramatic in the UK? Nowhere else in Europe pays the ludicrous sums that happen here - even the section of the A6 under construction near London/Derry is a much more sensible amount (~£13m/km). And that is through some quite hilly and difficult terrain. Compare to the £80m forecast for the A120 in Essex, or ~£40m for the A303 at Sparkford.

The A303 at Sparkford will have cost more per mile in design and planning costs than many other European countries pay to build roads. Something is very wrong somewhere

[darkcape]

Increase in standards & regulations - stricter designs, stricter tolerances, much more scrutiny of design changes & assessments, obviously far more archaeological, ground investigation, ecology/site clearance requirements, materials & labour are continually increasing, construction generally being a very inefficient and wasteful process...25 years ago isn't harking back to 1960s, but in my short time in the industry (7-years) each Highways England scheme I'm on has more and more requirements.

But why have those costs been so dramatic in the UK? Nowhere else in Europe pays the ludicrous sums that happen here - even the section of the A6 under construction near London/Derry is a much more sensible amount (~£13m/km). And that is through some quite hilly and difficult terrain. Compare to the £80m forecast for the A120 in Essex, or ~£40m for the A303 at Sparkford.

The A303 at Sparkford will have cost more per mile in design and planning costs than many other European countries pay to build roads. Something is very wrong somewhere

I don't know, I've offered some suggestions upthread. The point I was making is that highways construction is generally, on low margins and did not contribute to Carillion's administration.

[Herned]

I don't know, I've offered some suggestions upthread. The point I was making is that highways construction is generally, on low margins and did not contribute to Carillion's administration.

Yes, and they are very interesting, but what really puzzles me is why those don't apply in the same way in the rest of Europe - lots of environmental law is(was) at EU level, so should be equally onerous or not to other countries as well.