The collapse of Carillion has important lessons for Australia and New Zealand – it could happen here. Carillion, which went into liquidation in January, was the second largest construction company in the UK. It was contracted to deliver major public works, including new railways and hospitals, as well as other services in education, corrections and more. Carillion was locked into unprofitable contracts with the UK Government – the same situation our large contractors have found themselves in.
The collapse of Carillion means the UK Government is now faced with 450 contracts it has to take in-house and billions of pounds of uncompleted work. Additionally, tens of thousands of staff and thousands of Carillion’s smaller subcontracting firms have been plunged into uncertain futures.
The fact is, contractors need to make sustainable profits, because the economic risk of them failing is too high. The success of our major contractors and the success of our economy are co-dependent. In an outsourced market, we need contractors to produce public works and infrastructure – to engage, make decisions and actually make work happen on the ground – so we have schools, hospitals, roads, transport, water, power and other vital services.
In New Zealand you could argue we have even greater mutual dependence on our major contractors. There are only a handful of contractors with the geographical reach, subcontractor networks, and people, plant and processes, to deliver multiple major works. The due diligence and long lead-in times required for complex projects means if a supplier fails the process of finding alternative suppliers is prolonged and cumulatively more expensive.
As the success of the economy is interconnected with the success of our suppliers, we should be pursuing long-term Government-supplier relationships with sustainable margins. Government should embrace suppliers as partners, valuing the relationships, valuing the investment they make in their people, plant and processes, and taking an active interest in their financial success.
We need to avoid ‘race to the bottom’ bidding wars that lock contractors into unrealistically low prices.
Part of the issue is Government buying agencies – and contractors themselves – need more maturity in establishing sustainable price and margins. You can see how, when an agency has one bidder undercutting other bidders by say 20%, the temptation would be to throw caution out the window.
But parties need to be really clear on the risks, the levels of service expected, and the desired outcomes. The buying agency needs to choose a procurement model that suits the level of risk. That means interrogating and analysing precisely what is being delivered at the price. And if there are too many gaps or uncertainties – including the possibility of the price being unsustainable – this may compromise the agency and its level of service for taxpayers, and the risk is too high. In procurement that old adage applies: if a price seems too good to be true, it usually is.
Which isn’t to say that sometimes the lowest price genuinely offers the best deal, particularly in a low-risk scenario. But evaluate the risks first.
I am sure there are UK government agencies now managing failed contracts as a result of Carillion’s collapse wishing that they had.
Warner Cowin, Height CEO