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Maximise Your Profit, Minimise Your Risk

Written by: Iain Wishart

On day one of my first International project, I was called into a meeting with the Managing Director of the construction company that I was working for.  His instructions to me were: “bring in as much money as fast as you can, minimise my risk.”

Probably the clearest and the shortest instructions that I have ever had and that is what I did for that contractor for almost eleven years.

Since then, my own and my colleagues work as independent experts has added to our collective knowledge of errors made on construction projects, some of them brought about by the peculiar perhaps unique system of contracting (refer to my article The Importance of Being Earnest and in Construction Law Vol 31 NO 2 March 2020).

One of the advantages of carrying out forensic analyses of contracts that have suffered damaging and sometimes calamitous failures is that we are given the gift of hindsight. On projects that incurred problems, we investigate and analyse the causes of problems and the effects on money and time. Some of the causes are unique, but all ultimately affect profitability.

Following substantial losses, I read a Group Business and Recovery Plan Presentation to its creditors dated January 2018 from the British company Carillion (2016 group sales £5.2BN).  The presentation self-identified its strengths and some of its perceived weaknesses.

The plans stated objective was to “Put in place a rigorous and robust risk management framework to protect future margins and, a Cultural transformation, balancing the focus on delivery with a harder commercial edge”.  Amongst other matters it was seeking to achieve: –

Operational excellence – standard operating procedures, tools and training, consistent approach to work planning and monitoring

Contract management – rigorous focus on adherence to contract terms; senior contract management team to oversee performance, with specific responsibility around claims and risk (emphasis added).

 Included within the Recovery Plan was a section on Key themes and Issues.  Based on its recent history on contracts, it included the following items quoted below that the company identified as having caused some of its losses and I quote: –

  • Increasing size and complexity of services contracts, compounded by growth, not matched by our capability; (Note 1 below).
  • Contracts taken on with high degree of uncertainty around key assumptions. (Note 1 below);
  • Success on construction contracts dependent on performance of others not under our control (Note 1 below);
  • Risk Transfer. (Note 1 below);
  • Claims not managed or pursued in a timely and effective manner. (Note 1 below);
  • Portfolio not balanced in terms of cash generation;
  • Insufficient understanding of, and adherence to, contract requirements. (Note 1 below);
  • Ineffective change control – e.g., design changes on construction contracts agreed without agreeing incremental costs. (Note 1 below);
  • No focus on contract demobilisations, leading to cost overruns;
  • Poor planning and lack of effective contract controls and monitoring leading to inconsistent operational performance management. (Note 1 below);
  • Lack of effective handover from bid to mobilisation to delivery, leading to lack of knowledge transfer;
  • Lack of ownership of issues;
  • Geographic risk.

Note 1: These issues have also occurred on projects that our team has witnessed at first hand.

Of the 13 issues identified above, six could be classified as “pre-contract” issues and seven would appear to have occurred during the currency of Carillion’s contracts.

Unfortunately for Carillion, the recovery plan was not accepted, and the company ceased to exist.

I have also added some of my own observation of causes of loss where I have witnessed very serious errors made by contractors that caused substantial losses.  The more serious include: –

  • Guessing at the lowest tender that would be accepted, including discounting substantially its estimators calculated tender values;
  • Venturing into different construction forms and processes with little or no previous experience;
  • Selecting suppliers and sub-contractors on the basis of price without checking that they had experience, competence, resources, and financial stability;
  • Failing to implement effective cost and programme control and trend forecasting procedures to avoid disastrous consequences on a project until too late;
  • Remaining silent on projects when the Employer had continually failed to fulfil its obligations to pay within stipulated times; and / or the Engineer’s failure to agree anything including cost and time issues; and thereby increasing the contractor’s risk and exposure;
  • Failing to act decisively and / or not taking action with or terminating defaulting subcontractors and suppliers;
  • Failing to insist that subcontractors and suppliers implement systems including notice of changes and / or information requirements and / or problems in a timely fashion; only to see them raised as delay and / or cost issues at the end of the project.

(Note: throughout this article, I refer to the Engineer as the Employer’s representative and the individual or company responsible for administering the contract on behalf of the Employer.)

On one contract that I became involved in, I was startled to discover that the primary problems on the contract were caused by the first three precontract failures on my list above, compounded by the fourth item.  As one might imagine that particular project was a total disaster.  I have seen all four issues occurring on other projects but never before and thankfully not since, on the same project.

Of all the issues listed above, disputes on money and time issues are often exacerbated by failure to implement effective contract administration and control processes, including the mandatory contract requirements.  That comment applies to contractors and Engineers both.

Even assuming that the contracts are reasonably fair and balanced, and the contractor is capable of executing the works, putting in place experienced, competent contract administration personnel and systems to institute and implement effective project controls of contract, income, cost, and progress, ought to be a must.  The individual systems using experienced people ought not be difficult to implement and / or monitor but the people responsible for implementing and operating the systems cannot operate in a vacuum.  It requires effective internal and external communication systems (face to face and written) between contract administration staff and management, supervisory and other staff on site.   Management and on-site supervisors need to ensure that they communicate regularly and effectively with the contract administrators.  It also requires that the contract administrators communicate with the management, engineering, and supervisory staff at very frequent intervals.

If the contracts are not balanced or fair (and I have seen a few of those with unfair and very onerous contract terms), there is an even greater need to have effective project controls in place.  But what does the term mean, and how ought contractors implement them?

The short answer is anything and everything that will affect a contractor’s entitlement or obligations under a contract.  A change to a contractor’s, or its subcontractors’ or suppliers’ obligations will almost inevitably affect a contractor’s cost and, possibly affect its potential to complete the project on time which will also increase its costs and potentially make it subject to liquidated damages or penalties.

The headings below will provide an insight into the processes required.  How do I know?  Because I spent many years implementing them and supervising others on very high value and onerous contracts, and witnessed as an expert, the consequences of not implementing the type of procedures that I list below.

To expand on my definition of contract administration, listed below are the main headings and summary issues from a seminar programme titled “Maximise your Profit, Minimise your Risk” that we have delivered to contractors and other interested parties.  Briefly, we provide advice and guidance on what we consider are essential elements of cost and progress checking and control.

Internal and External Communications

  • Communications between the Contract Administrator (CA) and project team;
  • Clear commercial objective: “Make a profit”;
  • CA must institute clear communications with project team in all aspects of commercial management;
  • Open communications between the CA and department heads.

(Note throughout this article I refer to the Contract Administrator as the person or group responsible to the commercial administration on the project on behalf of the contractor and frequently carried out by QS’s).

Issues that the CA must be familiar with and address:

  • Communication with the Employer through the Engineer;
  • Recording of instructions received from the Engineer and reactions to them;
  • Internal communications and meetings with the contractor’s team and team leaders;
  • Communications with subcontractors’ and suppliers (to and from);
  • Programmes – master / daily / weekly / monthly etc. all progress reports;
  • Cost recording and control, including actual -v- estimate cost checks and reports;
  • Internally: access to site diaries, equipment returns, production records; photographs and videos;
  • In summary records, records, records.

Control of the following:

  • CVI’s (confirmation of verbal instructions);
  • Notices of additional work instructed and / or being carried out, including notices and instructions to subcontractors. Control of assessed values;
  • Notices of delays and the applications for extensions of time and projected delay costs;
  • Correspondence including emails to / from the Engineer relating to issues affecting cost and / or time;
  • Access to site diaries; daily records; plant returns; production records; progress reports; pictures / videos;
  • Responsible for all Commercial Reports, internal and external.

There are a number of integrated software programmes that allow the adoption of all information from site personnel into a centralised system or a virtual library.  One such system provides that each contributor is equipped with an app on their phone with predesigned forms for completion on at least a daily basis – labour and plant returns, subcontract performance, down time, material shortages, confirmation of verbal instructions etc. with the information shared with the contract administrator and the Engineer, as necessary.  However, it still needs individuals to coordinate, manage and evaluate the processes and, if required to pursue entitlement.

Of course, it is an equal responsibility of the Engineer’s representative to administer the contract properly and fairly on behalf of the Employer.  They should ensure for example, that if an instruction has been given to a contractor that might entitle it to more money and / or time then it is also their responsibility to recognise any changes made and, assuming that the contractor submits the details, engage with the contractor and check and evaluate the money and time consequences fairly and promptly.  Those matters should not be left unresolved until the end of the project.  Not to address them, can and does cause cash flow problems to contractors and subcontractors.  Failure to grant extensions of time with the potential effect on a contractor’s programme and cost, may also force the contractor to accelerate in an effort to mitigate the damage and may ultimately increase the contractor’s damages, if for example it increases working hours, or changes work sequences, both of which may exponentially decrease productivity and thereby increase costs.

I have seen internal reports on a project where the Engineer knew that the Contractor was experiencing difficulties due to unforeseen conditions and was accelerating the works to mitigate the effects.  The Engineer’s internal reports noted his disagreement with the contractor’s work methods but declined to issue instructions to slow down on the grounds that to do so would result in a claim for more time and more money.  What the Engineer described as a Catch 22 situation.

As my final word on the subject of contract administration, I was once confronted by a member of the Engineer’s staff on a project site who was annoyed at my habit of confirming any instructions that he or his colleagues gave to my contractor’s site supervisors’ and in his eyes, my even more annoying habit of sending in follow up notifications of change that entitled us to more money or time, or both.  My response was to mention some of his engineer colleagues by name and their discipline.  I pointed at myself and said, “me, I’m a money engineer, that’s my specialty”.  It silenced him, but he still saw me as someone who was a constraining influence on what he might want to instruct, which to me meant that I was just doing what I was paid to do, look after the contractor’s financial interests. I ended my conversation with him by stating: –

“I did not write the contract – I simply follow it”. 

That is what contract administration is all about, following the contract, properly and above all promptly.  Do not leave things to the end.

If you cannot resolve matters with the Engineer, and the dispute escalates my advice is to obtain legal advice if you have not already done so and seek independent expert advice.  Our group of companies can and does carry out project and / or independent claims review, sometimes called a “health check” or “sanity check”.

If your records are in good order, then (subject to legal and expert advice), and assuming that notices have been given, analyses have all been done (quantum and time), properly and professionally and submitted to the Engineer, you ought to be able to save a lot of money in a dispute process e.g., arbitration, dispute review board, expert determination to name but three.

Most of the work may already have been done and assuming that it has been done properly, an expert brought in to assist you, subject to any issues that might exist, ought to be able to rely substantially upon your records, your analyses, and your claimed values with minimal changes, or point out where he or she might require additional information or disagree with an issue or evaluation.

If you want to know more, including details of our in-house seminar please do not hesitate to send an email to info@iainwishart.com or via our website contact form.

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