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What Rok’s demise teaches industry

The sudden demise of the ‘nation’s local builder’ was an isolated incident but nevertheless offers important lessons for the sector, according to industry figures.

At its peak in 2007, Rok was valued at £437 million, employed more than 4,000 people and had revenue in excess of £1 billion. When administrators were called in three weeks ago, the firm’s share price valued it at just £34m.

What happened to make one of the industry’s leading lights one of the biggest victims of the downturn? And what should other contractors learn from the experience?

There is no doubt Rok’s £70m debt - accrued through a rapid programme of acquisitions - ultimately proved its undoing when public spending cuts hit confidence. But with administrators only able to sell £7m-worth of the company, rivals believe there were underlying problems at the firm.

Rob Hunt, the Pricewater-houseCooper administrator in charge of Rok, said its demise was sealed when public sector spending cuts were added to the ongoing recession.

Asked why so little of the company had been purchased, Mr Hunt said: “Some of that was due to malaise in the economy and some of it was the work Rok was doing. Most importantly, when people did that diligence, they felt there weren’t sufficient revenues in Rok based on the costs - they felt it unsustainable.”

He said “one or two companies” looked at buying the whole business but most were interested in specific parts.

The company’s rivals said Rok’s structure was a central cause of its collapse.

One senior figure at a rival firm said: “Rok was completely counter-intuitive as far as its fixed costs were concerned. It bought up lots and lots of companies so it had an incredibly heavy overhead burden.

“Every time you acquire a business, integration is resource- heavy and challenging. Rok did that in a grand style over a number of years and to get that right would be near impossible.

“Underestimating the impact of that integration process is a huge mistake - if you don’t get people working effectively with you, it comes at a very high price.”

Another industry figure said PwC’s failure to sell most of Rok’s contracts showed there was little profit to be had from them.

“Quite simply, if companies had looked at the work and felt it was good quality, there were enough good contractors out there to have gone for it. So there must have been fundamental problems with either the work that was being done or the prices it was being done for to put people off.”

Panmure Gordon building and support services analyst Andy Brown said he was concerned by the company’s high staff turnover.

“There was a high turnover of operational management staff and I think that is quite important because of the consistency of contracts,” he said.

Hudson Contract managing director David Jackson believes the company’s reliance on employees rather than trades labourers helped to precipitate its downfall, pointing to recent research which found that freelance wages have fallen below those of employees (CN 11 November p6).

Another analyst said: “Rok was trying to effect a move that no one else had managed in terms of becoming a national local builder, competing with the white van man. Where there was a decent size conurbation it would set up an office - no one had done that before and it proved a mistake.”

One CEO added: “Rok was very focused on one sector. And the plc structure promotes year-on-year growth, which is unsustainable.”

There may be several theories as to why Rok got itself in trouble, but one thing all agree on is that Connaught’s and Rok’s demise were not reflective of the sector. There is a consensus that their biggest rivals - including Kier, Morrisson, Mears and Wilmott Dixon - are in no danger of repeating their mistakes because they carry cash surpluses and diverse revenue sources.

One summed it up: “There isn’t a problem with the sector - there is a lot of work. It’s when you get the wrong business model winning work for the wrong prices you end up with a problem.”

 

Readers' comments (2)

  • Peter L Masters MCIM

    This article highlights the fact that companies across the board really have been "buying" work during this recessionary period. It can work for the bigger more established companies, bit it is clearly not a sustainable option unless you've got sufficient funds to maintain the day to day running costs of the business.

    Perhaps Rok's enthusiasm for buying up other companies to continue expanding their business model created a momentum they lost control of?

    Running costs when margins are minimal is a killer; 4,000 people's holiday pay is an awful lot of money and that's without giving it too much thought. That's obviously one of the main reasons so many SME's prefer to use subbies.

    Overconfidence is the biggest cause of downfall with businesses here in the UK. Perhaps these more austere times will encourage people to do a bit more walking before they break out into a sprint?

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  • In my personal opinion, the demise of Rok was due to several factors, so many a book would be needed to fully explain the complex intertwined issues. In the main the curent contracts for Housing and Construction were in good shape and on target to turn a profit, jobs were certainly not bought and were not allowed to be.
    Much of the problem was as a result of the very high workforce salary commitment, and the legacy in being paid for work in the responsive maintenance work, which was very cash hungry. Funding labour, materials and plant for thousands of small jobs, then the close out, invoicing and getting paid had little tolerance in terms of delays in payment, or work delays due to issues such as asbestos in artex (unpaid delay considered a contractors issue)
    Some aquisitions were poor choices with the aquired business in 2 instances being in huge debt and spiraling costs.
    Stock excange rules meant profit warnings had to be issued if / when things took a downturn which made trading more difficult and reduced investor, supplier and customer confidence.
    Over speculation of profits were sighted as a cause, although the stock market demanded a good projection otherwise investor confidence failed (damned if you do and damned if you dont). This was exacgerated by the withrawal of several contracts following government spending reviews.
    Several high spec offices in plush business parks were expensive and generally tied into long contracts (why would a maintenace business be in a business park and not in an industrial park where you could have stores and some sort of control over stock).
    Pilfering and skiving was rife, although this is only a rumour. Change every 6 months for sevaral years is said to have made it an uncontrollable and unstable environment.
    All staff had the same terms and conditions, so all trades had sick pay, holidays, bupa, pension etc, which was groundbreaking and attracted talent, but led to issues with a small proportion taking advantage of the system and 'milking' the generous rights given to them by the visionary and moulbreaking leadership.
    It is strongly felt the finances were just not fully understood, with little understanding of the debts owed and cash due, speed of invoicing was reported to be an issue for several months.
    On the whole it is said to have been a great place to work with each office having a relaxed atmosphere, chill out areas, and many things are so aspirational and advanced in our industry it will be years before another firm would dare to try many of the positives such as giving equal rights to all.

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