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Laing O'Rourke's Canadian hospital: What went wrong?

Laing O'Rourke_Centre Hospitalier de l’Université de Montréal_CHUM

The largest healthcare construction job in North America was supposed to herald a new era for Laing O’Rourke. So how did it end up inflicting losses running to tens of millions of pounds?

It was June 2011 when Laing O’Rourke put pen to paper on the deal to build the Centre hospitalier de l’Université de Montréal (CHUM).

Taking on the largest hospital job in North America, Laing O’Rourke and its construction partner Spanish firm OHL signed up to deliver the CAD$2.1bn (£1.18bn) 772-bed PPP scheme in Canada’s second largest city.

The deal was hailed at the time by the firm’s then Europe, Middle East and Canada boss Roger Robinson as its big entrance into the Canadian market.

Nearly seven years later, and the UK’s largest private contractor has quit Canada and is licking its wounds over a scheme that inflicted the first group loss in its history.

Over the past two years the loss-making CHUM scheme has taken a damaging toll on the company’s accounts. A writedown of £93m on the job in its FY 2016 results was part of an overall loss of £245m for the group – the first in its 15 years trading as Laing O’Rourke.

Last week the firm’s delayed accounts for the year to 31 March 2017 revealed further losses of £67m across the group, with Canada once again identified as the main factor behind the loss.

So how did a project seen as such a golden opportunity end up costing the UK contractor tens of millions of pounds?

Problems from the start

The recession hit Laing O’Rourke hard. After injecting vast sums into its offsite factory in Steetley, Nottinghamshire, during the mid-2000s, the cancellation of the £55bn Building Schools for Future programme and the Ministry of Defence’s £14bn St Athan plan left a £2.7bn hole in the contractor’s order book.

Looking to plug the gap, Laing O’Rourke entered Canada.

“Groundworks [took] longer because it was a very complex city centre site adjacent to an existing hospital”

Stewart McIntyre, Laing O’Rourke

The chance to bid on CHUM “came out of nowhere”, chief executive Ray O’Rourke told Construction News last year.

It was Innisfree, the UK-based infrastructure investment firm that Laing O’Rourke had worked with on UK PFI hospitals, which broached the possibility of working on CHUM.

Innisfree was already part of the JV bidding for the CHUM scheme alongside French services company Dalkia and Spanish contractor OHL. The team had initially included local contractor Axor when it was shortlisted in 2008, but it eventually pulled out.

The consortium, Collectif Sante Montreal (CSM), was bidding for the 38-year design, build, finance and maintain deal, with all parties raising initial funding but OHL and Axor in charge of delivery.

Needing support on the delivery side following Axor’s exit, Laing O’Rourke agreed to team up with OHL in a 50:50 JV, the Construction Sante Montreal, for the scheme’s CAD$1.8bn (£1.01bn) design and build.

The consortium was chosen ahead of a JV featuring Spanish firm Acciona and local contractor Pomerleau –after that JV was ruled out for being unable to guarantee the project in the given funding envelope – reaching financial close in 2011.

chum construction in 2014

chum construction in 2014

Source: Flickr user: Centre hospitalier de l’Université de Montréal

Under the deal the CSM JV would be required to deliver phase one the construction of the 22-storey hospital building by April 2016, which would account for 85 per cent of the programme. Once completed, phase two would begin, with the existing St Luc hospital demolished with the team then constructing outpatient facilities, clinical offices, as well as an amphitheatre and parking lots, with this scheduled to end in 2019.

The signing of the contract was hailed as a success, winning Project Finance Magazine’s 2012 American Deal of the Year award.

But while the scheme was winning global accolades, in Quebec there were questions around the construction timetable.

One source tells CN that, while bidding, CSM had been “overly optimistic” in its scheduling of the project. The source says the team’s deal to deliver all 772 beds by 22 April 2016, as originally planned, was earlier than had been expected by the client.

“In order to win the contract, they made a very optimistic assumption,” the source says. “They expected everything to go right – everything will be signed, everything will work.”

During the groundworks and the excavation of the hospital’s four basement floors, that ambitious delivery date was put under pressure.

“Groundworks [took] longer because it was a very complex city centre site adjacent to an existing hospital,” Laing O’Rourke’s group finance director Stewart McIntyre tells CN. “It is the classic situation of a very complex job in a new territory.”

CN understands that by the time the groundworks had concluded, the scheme was already running more than four months behind schedule.

Partner problems

As work on site above ground ramped up, the challenges increased.

Among these was the language barrier between the Spanish and English contingents of the management team, and its local workers and subcontractors.

The Charter of French language in Quebec requires French to be the language of business. Companies of more than 50 staff are required to speak French as the first language, including in internal and external communications, meetings and documents.

Laing O’Rourke told CN that all communication with workers was in French and CSM tried to employ French speakers where possible.

With Spanish and English contractors leading the scheme, there were difficulties in communicating and co-ordinating works with subcontractors and staff, CN understands. Mr McIntyre acknowledges there were challenges. “We went into a project in Canada, with a JV partner we hadn’t worked with before, with an architect we hadn’t worked with before, into French-speaking Quebec to build what is the second largest hospital in the world as a PFI contract,” he says.

There also appear to have been challenges within the JV. As Mr O’Rourke admitted last year: “Generally JVs can be difficult but if you go about them in the right way at the very start […] I think that’s probably where we didn’t get as much done as we should have.”

chum construction 2015

chum construction 2015

Source: Flickr user: Centre hospitalier de l’Université de Montréal

During the early years of the partnership, OHL was enjoying commercial success. In May 2013 the Spanish firm’s chairman Juan-Miguel Villar Mir hailed the firm’s 2012 balance sheet as the best in its 100-year history. OHL’s shares stood at €29.54 per share with the firm posting a net profit of €280m.

By mid-2014, OHL’s fortunes had begun to nosedive. At the start of 2016, heavy losses in the business had seen nearly 85 per cent shaved off its 2013 value. According to those working on CHUM, OHL’s struggles coincided with the firm having a less hands-on role with the day-to-day delivery of the scheme.

Sources tell CN that many OHL staff had left the project during 2016, with Canadian CSM staff referring to themselves as Laing O’Rourke employees.

Laing O’Rourke had also undergone a huge shake-up internally. Its late former chief executive Anna Stewart, who died last year, had taken on the CEO role in 2013 from Mr O’Rourke.

Mr Robinson left his role as the group’s Europe, Middle East and Canada boss in March 2014, before Ray O’Rourke then took back the CEO role in December 2015 due to Ms Stewart’s illness.

The Laing O’Rourke founder took a more active role in interrogating the CHUM scheme and the day-to-day running of the company, and made a fresh attempt at trying to maintain the relationship between his company and OHL.

“In order to win the contract, they made a very optimistic assumption. They expected everything to go right – everything will be signed, everything will work”

Unnamed source

Mr McIntyre claims the relationship between O’Rourke and OHL is now “very good”, with the two firms in contact monthly in both Canada and Europe. But the diminishing role of OHL on CHUM is reflected in the make-up of CSM’s management team when the project was completed.

In February 2015, according to its website, the CSM management team had five OHL employees in it, including OHL’s John Hewson as project director.

By April 2016 that number had been cut, with only Mr Hewson, commercial director Mike Deeming and block D project manager Jorge Alberto Garcia Arroyo of OHL still in the leadership team.

By the autumn of 2016, Mr Arroyo had left to head up OHL’s UK & Ireland arm. Mr Deeming would soon follow.

And by April 2017, Mr Hewson had also exited CHUM, leaving construction director and Laing O’Rourke employee Lindsay McGibbon to take over as project director.

Delivery issues

It was Quebec newspaper La Presse that summed up the mood on the CHUM site in late 2016, retelling a joke circulating around the site’s workers.

“Do you know why the architects kept the old church steeple on one corner of the building?” a worker would ask. “It’s because the members of the consortium pray there every morning for the project to end one day – and without exceeding their budget.”

With the groundworks already behind schedule, the worst was yet to come for CSM.

CN has heard a series of stories from those close to the project about issues throughout the delivery. Tales of issues with the architectural drawings, toilets being dismantled just after they had been installed, and exit signs being changed to new models despite the electrical boxes behind the signs already being in place.

chum new path between

chum new path between

Source: Flickr user: Centre hospitalier de l’Université de Montréal

All of these issues resulted in additional costs. In one case, a source tells CN of an incident in which an entire ventilation system had to be ripped out and reinstalled after the client found it did not match up to Quebec building standards.

Another story revolves around the installation of waste pipes. After drilling a number of holes for the pipes in the wrong place, it was soon realised that new ones would need to be drilled. But the new holes weakened the floor, which could no longer withstand the weight. Carbon sheets had to be installed for support, incurring significantextra costs.

A Laing O’Rourke spokesman said the JV assembled a leading healthcare team, which was able to deliver 80 per cent rather than 50 per cent of accomodation for the first phase. He added “as with any major project spanning a number of years, the team responded to design changes and worked together to find solutions to unexpected as they arose.”

With the delivery issues stacking up, in late 2015 CSM decided to take action. By this point it was clear the project would miss its April 2016 deadline and the hospital soon confirmed a seven-month delay.

Believing CHUM as the client was responsible for part of these delays and cost overruns, CSM put forward an initial claim for CAD$367m (£206m). This was split into CAD$330m (£186m) for the late delivery of phase one, and CAD$37m (£20m) for the impact this would have on delivering phase two. Needless to say, CHUM did not agree.

After discussions between both parties, which lasted more than a year, an agreement was finally reached. The client would eventually agree to hand over some money to cover the delays. In December 2016 both parties agreed on the sum of CAD$125m (£70m) to be paid to CSM. 

Subcontractor disputes

When CSM signed its deal in 2011, it is understood the PPP agreement stated that once the hospital was completed, the CSM JV would be paid around CAD$11m every month for the duration of the PPP deal.

When that April completion deadline for the first phase was not met, the $11m payment was not handed over.

Within a month, CSM’s problems were compounded by a wave of claims from subcontractors for work they had carried out. As the completion date continued to slip, these claims increased.

“Every known loss at this stage is included in the March 2017 numbers, we do not kick losses down the line”

Stewart McIntyre, Laing O’Rourke

In Canada, ‘hypotheque legale’ is used to protect subcontractor payments. Under the hypotheque legale system, subcontractors are given a mortgage on the building they are working on. If they are not paid what is owed to them, or a settlement is not agreed, the judge can put the building up for sale, with the subcontractor retrieving the cash generated.

In May 2016, concrete firm Oldcastle Precast issued the first hypotheque legale against CSM, claiming a payment of CAD$5.2m from the JV. Others would follow. In the space of 18 months from May 2016, nearly 30 claims were put forward totalling around CAD$200m (£112m).

These included a CAD$36m (£21m) from Groupe SCV and two claims of CAD$36m (£21m) from contractor EBC.

A Laing O’Rourke spokesman said the hypotheques system could not compare to the UK system and the “quantum and veracity of claims was hard to draw.” He added that a significant number of the claims had now been withdrawn, removed or rejected.

Looking ahead

Despite the problems and claims hanging over the JV, by 31 March 2017, CSM had achieved “substantial completion” of CHUM.

After a six-month handover period, on 8 October patients began transferring to the new super hospital. Within two hours of opening, the hospital’s first baby was born.

Even after the handover, there were some teething problems.

On 10 October, in the week the hospital had begun accepting patients, local unions reported a number of glitches including overflowing showers and malfunctioning equipment.

On 22 October the transfer of patients to CHUM was completed.

chum 11 credit jeangagnon

chum 11 credit jeangagnon

Source: Wikimedia user JeanGagnon

One of the most complex hospital jobs in the world was fully complete and operational, with 772 beds in single rooms, 39 operating theatres, 66 intensive care beds and 22 storeys.

At this point, CSM moved to minimise its risk on the rest of the scheme. As part of the contract, CSM was signed up to demolish the old St Luc hospital and construct new adminsiterial and outpatient offices.

Within weeks it had entered discussions with local contractor Pomerleau to assist with the delivery of this second phase. By last December, CSM had handed over complete control of phase two, in a contract worth £235m.

However, despite being able to hand over the delivery of the second phase, Laing O’Rourke’s relationship with CHUM is not quite over yet.

While the CSM team has been stripped back, Laing O’Rourke is still keeping one of its senior people – former Australia programme director Chris Wilkinson – in Canada to monitor the handover and delivery of phase two.

And then there are the legacies of phase one. 

The majority of claims against CSM have been dealt with and new claims have all but stopped. There has only been one since the end of January.

Laing O’Rourke still faces some significant claims from subcontractors. These include a CAD$56m claim from M&E contractor Reko, part of claims lodged back in 2016, while services provider Regulvar also has seven claims totalling more than CAD$14m.

“We are going through normal commercial discussions as on any contract,” says group FD Stewart McIntyre, commenting on the outstanding claims. “The 2017 numbers reflect our assessment of where we will reach an outcome; I am comfortable with what we have done on that, that we will reach a satisfactory conclusion.” 

Fingers burnt

For Laing O’Rourke, the fallout from CHUM is not completely over just yet.

Mr McIntyre admitted future losses are possible on the scheme, but expects that if there are losses they would amount to millions, rather than tens of millions.

The move to contract Pomerleau for phase two will minimise risk and ensure losses cannot balloon like on phase one.

The project has no doubt left a scar on the firm, but the worst now appears to have passed.

“Every known loss at this stage is included in the March 2017 numbers, we do not kick losses down the line,” Mr McIntyre says. “We will be back in profit next year.”

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