Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to the newest version of your browser.

Your browser appears to have cookies disabled. For the best experience of Construction News, please enable cookies in your browser.

Welcome to the Construction News site. As we have relaunched, you will have to sign in once now and agree for us to use cookies, so you won't need to log in each time you visit our site.
Learn more

Carillion lessons: Risk, reward and contract fundamentals

Nigel Blundell

Press coverage of Carillion’s demise illustrated the impact it had on the whole country – a stark reminder of the construction sector’s importance. 

But what are the vital changes that should be made?

Clearly an over-emphasis on fixed-price contracting and under-priced tendering does not work – there is limited upside and, on big projects, nearly unlimited downside. Carillion’s collapse has also highlighted the pitfalls of paying one party to take all of the risk for a low margin when they are not directly undertaking most of the work.

Risk is the key word, and its allocation is not being considered properly. A main contractor cannot fully understand the nuances of all specialist aspects of a project, or assume and manage that risk fully.

Tired practices

Frankly, these are lessons that should have been learned some time ago. We know some of the answers lie simply in all project stakeholders working together closely, sharing risk and moving forward from tired practices that only inspire dispute and project failures. The industry has to collaborate.

There must be greater supply chain involvement at the outset of a project to minimise and understand risk. The industry needs to start implementing incentivisation – either through the contract mechanisms or by long-term collaborative arrangements.

It’s vital that employers are fully engaged with all parties involved. The impact on Carillion’s supply chain has been far-reaching and this could have been prevented by protecting supply chain payments.

“The industry as a whole has a duty to consider what changes need to be made to prevent another disaster like Carillion happening again”

Early contractor involvement should be encouraged, with two-stage tendering becoming the norm. Techniques that enable full understanding of technical and risk issues should be promoted, such as build-in-a-day workshops, pre-contract site visits, project and cultural workshops.

Shift in value

Looking further ahead and following Brexit, procurement rules should be changed so that any contractor who assists a client at feasibility level isn’t locked out of the procurement process. This would be an aid to continuity, in contrast to than the current regime.

The basis of tendering must be considered. Rather than prescriptive standards, output specification with ‘best for project’ and minimum conditions of satisfaction can be utilised.

We need to see a shift in how we define value, looking more at long-term success rather than purely cost and time-to-completion. Better and wider engagement at the design stage with end-users, including those who will work in and maintain the completed project, will help everyone realise the implications of a particular design. This will promote the best-for-project ethos, rather than a silo approach to each stage.

Simple concept

Finally, there needs to be a reduced emphasis on fixed-price contracting, with client-side professionals sharing in the rewards of successful delivery. It’s a simple concept, but giving all parties a stake in a project’s success can make a huge difference.

Where insurance can be used to mitigate cost overrun or latent defects, this should be considered to avoid the potential for disputes. Funders need to understand that a contract being fixed-price is not the key indicator of project success.

The industry as a whole has a duty to consider what changes need to be made to prevent another disaster like Carillion happening again.

Everyone will need to be bold in their thinking and start collaborating at all stages of a project to ensure UK construction continues to be a world leader.

Nigel Blundell is a partner at Pinsent Masons

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions. Links may be included in your comments but HTML is not permitted.