Today we discovered what’s gone wrong with Balfour Beatty – or at least what’s gone wrong according to accounting giant KPMG.
KPMG’s report reads like some kind of Contracting for Dummies textbook, the sort created for year one undergraduates to help them understand how – or how not to – run a civil engineering contracting business.
KPMG claims to have identified “root causes of poor operational performance”. And they’re classics. In KPMG’s words:
- Poor bidding with tendering at very low margins with optimistic assumptions around cost, programme and procurement savings and with inadequate provision for risk;
- Poor contract management with insufficient challenging of contract performance, failure to recover genuine contract entitlement and optimistic assumptions on contract penalties;
- And poor cost forecasting with insufficient visibility, control and understanding on actual versus reported contract performance.
Frankly it makes many of its engineers look rather foolish; naïve even. But is what was going on there really all that different to what will have been going on at contractors up and down the land throughout this recent, prolonged recession?
Is this not just the case that we have heard about this because Balfour Beatty is publicly listed, and has had a very public fall from grace? Shareholders need to see assertive action. Blame must be apportioned, scapegoats must be made, decisive action must be taken and confidence must be restored.
That’s really all that’s happened here. You can’t tell me – or anyone in this industry – that any of what KPMG has just reported is new; is surprising; is unexpected even. It’s just the way civils contractors frequently respond when money gets tight.
Balfour Beatty erred in buying in to the UK regional civils market just when the bottom was about to fall out of the market. But as KPMG says, that was a contributory factor, “compounding the problem”. It was not the root cause.
So what’s the lesson? What was the root cause?
Clearly it is not OK that Balfour Beatty has managed its business this way. But whatever the errors there are some big external factors at play, and they apply across the industry. Take the clients. UK clients want to see a competitive market, a strong market capable of filling their tender lists with good, capable, innovative contractors. Yet these are the clients that have spent the last seven years squeezing prices into the ground, so that most – if not all – contractors are now operating at or around a 1% profit margin. That is clearly not sustainable.
And nor is it desirable. The market needs a strong Balfour Beatty. Clients need a strong Balfour Beatty. And many more like it.
And let’s face it – there are many more Balfour Beatty’s out there – serious, established contractors who are struggling to cope with seven years’ of chronic, squeezed prices. They just haven’t been subjected to a very public audit.
Watch this space.