The collapse of the construction group, Carillion, leaving an estimated pension hole of around £2.6billion, and total liabilities of around £5billion, means many businesses and public sector workers are doubtful about their future.
Carillion’s supply chain stretches far and wide, and the number of companies impacted by this collapse is huge. Setting aside the inevitable political and public sector fallout, what can your business learn from this disaster?
The tipping point for Carillion was reached when banks and the Government refused to provide the financing it needed to maintain its cash flow. But the source of its debt and cash flow issues is something far more prosaic – and something that your business will almost certainly have experienced.
Managing Uncertainty and Change
As a supplier to the Government on major construction projects, Carillion was required to enter into fixed price contracts for projects with uncertain scope. Three, in particular, resulted in huge cost overruns: the Aberdeen Bypass, the Royal Liverpool University Hospital, and the Midland Metropolitan Hospital.
As with many large, long-term contracts, the total costs involved were little more than estimates at the contract start. In itself, that’s not a problem – provided the company, its subcontractors and its client (the Government) are all aligned and have a common understanding of the pricing basis, and an agreed change control mechanism.
It’s inevitable with a project of significant length and complexity, whether in construction, tech development, or any other field, that things will go wrong and you could find yourself in deep water.
These fall into two categories:
1. ‘unknown unknowns’ – things you could never have anticipated; and
2. ‘known unknowns’ – where you know there’s a risk of something bad happening, you’re just not sure exactly what it will be!
Carillion experienced both. One of their ‘known unknowns’ was the discovery of asbestos at the brownfield site for the Royal Liverpool. While they may not have known of its existence at the time they entered into the contract, they must surely have known it was a possibility. Providing appropriately for how costs and timescales would be impacted in the event of asbestos being present on site would have mitigated some of the huge cost overruns on this project, and reduced Carillion’s financial exposure.
In the ‘unknown unknown’ arena, they were hampered by high winds, which prevented the use of cranes on the Liverpool site. Harder to plan for, this was nonetheless possible to contract for.
What can you do better?
When structuring any deal you wish to contract for, you may want to consider the Devant ‘three triangles’ model. Just three simple questions, which can go as deep and as wide as necessary to ensure you properly understand the risks and opportunities in your deal:
1. Who does what, when?
2. When does money change hands?
3. What happens if things go wrong?
By looking at the ‘known unknowns’ in your project, and factoring in some ‘what if’ scenarios, you can avoid being caught out by unfortunate (but predictable) disasters. Setting out clear dependencies and specifying contractual break-points if those dependencies are not met, or assumptions are not true, means you’re not on the hook to deliver at a fixed price, ‘no matter what’.
Of course, this has to be done in a fair and sensible way that manages risk appropriately for both buyer and seller. Something that can only happen if both parties have open, grown-up conversations about where the risks lie, and how best to deal with them.
Taking a grown-up, practical look at contracting
As a former engineer, my view of commercial contracts is that they are tools to help achieve a desired outcome. They are not an end in themselves. The contracting and negotiation process shouldn’t be an exercise in “mine’s bigger than yours”, or bullying-tactics. It should be used to help both parties understand what each of them needs to do, and to receive, in order to achieve the outcomes they anticipate.
For this reason, the workshops that I deliver for Devant’s clients are focussed on helping you achieve your desired outcomes. Our March workshop is about Reviewing, Understanding and Amending Commercial Contracts and Statements of Work. It covers the legal terminology, as it’s important that those structuring, reviewing and negotiating deals understand what the legalese means in a business context. But the real focus is on how to use the contract to help you achieve what you set out to do. In particular, how to create statements of work that manage risk and maximise opportunity for both buyer and seller.
Our April workshop is a contract negotiation masterclass. It’s designed to give you the tools you need to negotiate fairly and collaboratively – and to deal with the challenge of counterparties (and internal stakeholders) who have other agendas.
Don’t fall into the Carillion trap!
We only have twelve places available at each of these two workshops, and they do book up fast. So take a look and secure your place and save with our early bird discount:-
- Reviewing, Understanding and Amending Commercial Contracts and Statements of Work, starting on 27th March for two days.
- The April course on Negotiating Commercial Contracts and Statements of Work is on 24th and 25th.
Both of these workshops are held in London’s Marble Arch, easily accessible and close to great shopping and restaurants. The course fee includes breakfast, lunch and refreshments, as well as all course materials, plus a free post-course webinar to cement your learning and answer your questions, a month after the event. The agendas and course details are available on our contract training site, tiffanykemp.com along with alternative dates.
I hope to see you in March – if you have any questions about the workshops, please drop me a line or give me a call. I’m happy to talk through whether they’re appropriate for your needs, or those of your team.
Founder and Managing Director