Crossrail is taking the unusual step of obtaining daily alerts on the financial strength of its suppliers as it looks to prevent companies from going bust on Europe’s biggest engineering project.
Procurement chiefs at Crossrail told Construction News of the move in the week that a 152-year-old contractor went into administration and the £49 million debts of another failed firm were revealed.
Crossrail chiefs are being briefed each morning by portfolio management company D&B. The briefings raise red flags if any first-, second- or third-tier suppliers are changing their financial patterns.
If any supplier is subject to a winding-up order, is an insolvency risk or is changing the profile of its payments, Crossrail is made immediately aware before taking steps to alert project managers and its tier one suppliers.
In an exclusive interview with CN, Crossrail head of procurement Martin Rowark and programme supply chain manager John Mead, both of whom worked on the 2012 Olympics, set out the contrasting approach to supply chain management taken by the two projects.
While a failing subcontractor on the 2012 project may have been bought out to keep the programme on track, Crossrail is sharing its red flags with suppliers in order to prevent company failures.
Mr Rowark said: “If a steel fabricator was about to go bust on the Olympics, in theory the strategy was that we would go in and purchase them because that would mean Usain Bolt could run the 100 metres on time, otherwise there would be a debacle of huge proportions.
“On Crossrail we haven’t necessarily got that plan. We would identify the project manager and in turn his tier one contractor and say ‘you’ve got a problem, but not just you’; a number of other tier ones might have the same subcontractor so we can support them across the entire programme.”
Crossrail is currently putting together a map of its suppliers based on information from its tier one contractors.
Mr Mead, who is tasked with putting together the map, said the challenge faced by contractors on Crossrail was where individual subcontractors were appearing on multiple tender lists.
“We have a situation where if one of those tier two or three subcontractors was to win everything they are bidding for, it would represent probably 200 per cent of their capacity,” he said.
“It’s not for us to say to the tier ones ‘you can’t use them’, but what we will do is raise that flag and say there is a potential capacity issue for the programme and we need to know if you are managing that.”
Crossrail data shown to CN indicates around 150 of the critical tier two contracts have been awarded to date at a total value of over £500m, of which around 90 per cent has gone to UK businesses.
Mr Rowark said: “It’s the capacity in the second tier we’re really interested in. For a lot of our joint ventures, their collective capacity runs into billions but it is not a correct indicator of their total capacity because most of the work is delivered by the supply chain below them.
“As they are all fishing in the same pond for that capacity [at tier two and three levels] we are looking at tier twos to make sure that ‘project A’ won’t cause a problem for ‘project B’ by main contractors buying up all that same capacity.”
The issue came to the fore last week when the Trade Association Forum held a CEO lunch with chief secretary to the Treasury Danny Alexander, at which National Specialist Contractors Council chief executive Suzannah Nichol raised the issue of fair payment.
Ms Nichol pointed to the recent case of mechanical and electrical giant MJN Colston going into administration while owing almost £4m in retentions.
She said Crossrail was proving to be an exemplar client for subcontractors, but said the public sector was now leading the way on fair payment.
She expected a short-term acceleration in the gap between public and private sectors, as well as the number of high-profile administrations.
Ms Nichol said: “A client like Crossrail is excellent for our members, as if you go to them with a payment problem they will look at it, whereas most clients ask ‘what do you want me to do?’.
“But the industry does itself a massive disservice by not performing responsibly when it comes to fair payment and cashflow is a key part of what is killing businesses.
“If you look at businesses that are going bust, like MJN Colston, they were still set to make a profit but it’s cashflow that is the problem.”
Late payment continues to bite
Late payment is a bigger problem in the construction industry than any other sector, according to research launched on Tuesday.
The survey of 500 UK businesses also found that 31 per cent of construction companies reported that they had almost gone out of business.
The findings of the report, by commercial credit referencing agency Graydon UK, working with the Forum of Private Business, were discussed at a House of Commons summit attended by representatives from Department for Business, the Labour Party and financial institutions including Lloyds.
Construction minister Mark Prisk said more than 1,000 government suppliers across industries have now signed up to the government’s prompt payment code.
He added: “The culture of late payment needs to be changed, which is why we are working with the private and public sector to allow them to better manage their cashflow and get bills paid on time.
“Legislation alone cannot do enough to enforce prompt payment of suppliers. We need practical, business-focused solutions to help SMEs in particular and make sure they are paid on time and on fair terms.
“This change will benefit the entire business supply chain by allowing suppliers to remain competitive and giving businesses more choice.”
Project Bank Accounts boost SMEs
Crossrail uses Project Bank Accounts for all its tier one contractors and has made payments of around £400 million to date, with that figure expected to rise to around £5 billion over the project’s lifetime.
PBAs were first used by Crossrail at the beginning of 2011 and it intends for all NEC3 Option C main works contracts to use a PBA.
The sums paid into the Crossrail PBAs are protected via the creation of a trust that is set up by the employer and contractor, under which the beneficiaries are each tier of the supply chain.
This protects the sums owed to a subcontractor or supplier in the case of main contractor insolvency. Crossrail also employs a fair payment charter for suppliers.
A Crossrail spokesman said: “The benefits of PBAs are only likely to significantly materialise if the whole industry adopts and delivers a fair payment culture.
“Late payment is not ethically acceptable. Fair payment, which PBAs support, is essential to achieving successful, integrated working on construction projects.”