Yesterday’s £7m profit warning from contractor ISG is part of an “endemic” industry problem as main contractors trying to close out projects won in 2012 experience a wave of claims, delays and even site walk-offs from subcontractors, it’s been claimed.
Contracts and management consultant Jason Farnell of CR Management told Construction Manager that, based on his observations and clients’ experience, finishing trade subcontractors were most likely to put financial pressure on Tier 1 employers as contract close-out neared.
He also suggested that jobs involving multiple units – such as student accommodation, hotels or apartments – were the most vulnerable.
ISG yesterday morning issued a Stock Exchange statement linking a £7m shortfall to four projects, including a “large” contract entered into in 2012 which industry speculation has identified as the £61m contract to build chalet accommodation at Centre Parcs in Woburn.
ISG flagged up a £6m loss linked to exiting its London “exclusive” residential business, where it apparently has five major contracts with three still on site.
It also anticipates an £11m bill linked to the closure of its Tonbridge office, originally announced on 30 June 2014 when the costs were put at £3.5m. The statement says: “This closure has adversely impacted its ability to collect sums due on the remaining projects within this division.”
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Farnell told CM: “We’re finding with our clients that they’re having problems finishing jobs won two years ago, there’s a lot pressure from subcontractors. I’ve seen some fairly creative ‘loss of profit’ claims from subcontractors to recover higher overheads – and that’s just from the ones that are sticking within the terms of the contract.
“Others are threatening to walk off. I have come across cases where they have walked off [to take on better paying work elsewhere] but sometimes it’s a threat – as in pay up or you’ll have a bigger problem soon.”
Farnell said that finishing trades, such as dry-liners, were most likely to exploit their ability to get between the Tier 1 contractor and the client’s final payments. “Contractors find it very difficult to exit jobs where you have multiple units to finish – for instance, if you have a problem with one trade that doesn’t perform, then you can have major sequencing problems.
“Or if you have 10 [fit-out] subcontractors that might have contributed to the problem, it’s hard to definitively point the finger in order to levy damages. And in any case you can’t do so prospectively [in anticipation of financial penalties from the client], you have to wait until you’re hit by a liquidated damages claim yourself.”
Asked what Tier 1 contractors could do in future to avoid getting into this situation, Farnell said: “Exit contracting – that’s what we’ve seen other major players do, or pursue less risky procurement routes. If companies exit because of over-supply, then in theory the market will self-adjust.”
ISG’s statement says that the company’s write-downs result from a “recently completed contracts performance review” by Phil Brown, the new construction managing director at ISG.
Brown, formerly group risk director at ISG, took on the role in October 2014 following the departure of Alan McCarthy-Wyper. Four regional construction managing directors report in to Brown.
On a more upbeat note, ISG says that “contracts procured since the start of the financial year continue to be secured on significantly improved terms… reflecting the group’s initiatives to improve procurement, bid and risk management”. It also adds that “the business has continued to focus on winning work from repeat customers and frameworks, and on reducing open market tendering.”
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