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Carillion sticks to its guns in margins row

Contractor Carillion has told the government that it will not sacrifice its margins just to appease Cabinet Office demands for suppliers to cut their rates.

Carillion was one of 34 tier two government suppliers called in by Cabinet Office minister Francis Maude for a grilling about their fees late last year (NCE 18 November).

Maude wanted the firms to repay cash already earned and offer discounts on work in the pipeline to claw back £800M from fees due to be paid to suppliers this financial year.

But Carillion this week said actions agreed as a result would have “no material impact” on its profitability.

“The outcome of these discussions has no material effect on Carillion’s current market guidance,” it said in a trading statement.”

These actions included signing a memorandum of understanding identifying ways in which the firm can work with government to help re-engineer procurement and service delivery.

These include changing the scale and scope of outsourced services across a number of existing contracts.

Carillion said that opportunities to work with central and local government to deliver greater efficiencies through outsourcing services remain very strong.

“We look forward to working with our customers to provide value for money services that support their business objectives”

John McDonough

“We look forward to working with our customers to provide value for money services that support their business objectives and with government customers specifically to improve efficiency and deliver savings that will enable them to reduce running costs,” said chief executive John McDonough.

Carillion’s announcement comes a month after Atkins chief executive Keith Clarke also ruled out any suggestion that his firm would cut its rates (NCE 2 December 2010).

Atkins was also called in by Maude as part of the same process. Other civils firms included Balfour Beatty, Interserve, Mott MacDonald and Mouchel.

“I say now, we have not changed our [financial] outlook for the year based on that [discussion],” said Clarke in December.

“We will not do work at a loss. It destroys long-term value for the client, let alone us. I am very firm on that.”

Maude told firms he wanted them to look at the government contracts they have and work out how much of the money already earned this year they would be willing to give back.

He also asked them how much they were prepared to cut rates for future work.

Ideas for efficiency savings would be welcomed, Maude told them, but only after they had offered to repay some cash.

Readers' comments (3)

  • What does the request to 'pay back money already earned' tell us about major programme cost controls under the previous administration?
    Will cost overruns incurred due to client delays, scope creep, specification changes and client programme management skills be offered to the contracting teams as reciprocal 'goodwill'?
    The UK should look at the US GAO's approach. The GAO encourages departments to work constructively with the tier 1 and 2 providers to focus on lifecycle cost and earned value not short term savings for their own sake.
    See the excellent GAO cost estimating and assessment guide from 2009 for best practice. It took two years to prepare and brought together a team of specifiers, end users and contractors - who all freely shared best practice and knowledge to produce an outstanding document. The GAO team who led this initiative was less than 5 strong - which shows what can be achieved with excellent stewardship and positive relationships. They also continue to draw on the contributors' goodwill and skills for updates. Teamwork and shared risk/returns = mutual respect.

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  • It is to Atkins' and Carillion's credit that they have refused to cut margins simply because of some diktat from the Cabinet Office. I trust many others will do the same!

    I can sympathise and agree with Andrew Crossley's comments about payments back from Clients and would go further.

    Many's the time I've sat down with Consultants representing Clients and they have moaned about us, the Contractor, making too much money, including Variations and EOT claims - i.e. more than their estimate of the margin that they believe Contractors should reasonably expect. My answer was always the same and stopped the discussion immediately! I simply explained that the principle could not apply unless the Client was also prepared to under-write any Contractors' losses or margins below Tender stage expectations which occur for whatever reason. I also explained that Contracting was a Swings and Roundabouts business - you make good money on some contracts, less on others and too often well below tender estimates, and even losses on others - but overall, you hope to keep your average margin in line with start of year expectations.

    Cutting margin's is the limit of most accountants', and too many Quantity Surveyors', or Asset Managers' as they now often like to be called, understanding of Cost Control and Value for Money.

    Clients would be better off if they used their time:
    1. setting up Projects on the basis of Contractor/Consultants providing better more efficient and cost effective long term design, supply, operational cost and better reliability/availability schemes - all with increased margins, and not lower margins, in recognition of the demonstrated Client savings any proposal provides.
    2. providing better, more accurate and more comprehensive workscope definitions, scope and interface limits, risk allocations, and specifications prior to entering into fixed price contracts - thus avoiding the need for excessive numbers of relatively expensive V.O. and EOT claimed extra works to complete the Project.
    3. providing independent and separate Supervising Engineers for all post Contract Signature Contract Supervision and Contract Administration, and not the Engineer responsible for pre-contract studies and investigations, the specifications, any concept design work and where appropriate detailed designs.

    Clients would then be surprised how much money they could save and how much value for money they could receive!

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  • One further comment in line with Andrew Crossley's comment on Cost Control.

    I was taught cost control on major projects by an American Engineer in my Team on a Petro Chemical Project overseas over 30 years ago. She, yes - she was definitely very female, was an engineer, had worked on major works around the world and, as such, unlike a QS could fully understand the design, supply, fabrication, erection, testing, commissioning and operation works involved, particularly on works which have a very high MEICA works content!

    As a result she could anticipate risk and scope changes coming, could more easily identify all across the board costs and delays emanating from such changes in risk or scope or delays and disruption, and could properly allocate from the start all such additional costs and time elements against each component cost heading involved for all such "Change" events. As a result a good estimate of the time and cost implications of any Change could be presented to the Client very early on after the Change Incident and kept updated and as such Max Abrahamson's quite famous advice as to what was needed for successful claims, namely "records, more records, and even more records" was more easily achieved - and contemporaneous records at that!

    As a result we proved and obtained a very significant extra income from VO's and EOT's and at the same time kept the Client fully aware of current updated Final Cost estimates. We also provided a massive amount of contemporaneous records enabling the Client to recover many of ourclaimed extra costs and delays as contra-chargeable items against other Parties involved in the Project.

    The key to all this was to use qualified engineers and not QS's to operate, manage and administer Cost Control and Reporting Systems - something which is largely missing within the industry in the UK!

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