With debts of over £900M, and reportedly just £29m in the bank Carillion, the UK’s second largest construction company were unceremoniously placed into liquidation on January 16th with lenders refusing to provide any more financial support. This won’t have escaped anyones attention but it does raise the question of the role of risk management and suggest that there are significant lessons on risk that need to be learnt by the industry.
It has been suggested by many commentators that it was Carillion’s construction contracts more than anything that brought the company down. With reported margins on these contracts as low as 3% it’s hardly surprising that cash flow came under pressure when completion of stages were delayed on major UK construction projects, these include: .
- The £353m Midland Metropolitan Hospital,
- Merseyside’s “new” £335m Royal Liverpool Hospital
- The £745m Aberdeen bypass
The cause of these delays according to The Guardian was the result of seemingly multiple problems. The Royal Liverpool Hospital ran into problems when workers found “extensive” asbestos on the brownfield site and cracks in the new building. Delays on the Midland Metropolitan Hospital were blamed on the fitting of pipes and wires taking longer than expected, whilst in Aberdeen the road delays were a result of cold weather during winter.
It’s not clear how well risk management was embedded both at project and enterprise level within the organization, but anecdotal evidence suggests that Carillion suffered from similar challenges to other large construction groups.
Whilst each project will have likely kept a log of risks, the system is let down by the technology that is frequently being used, namely spreadsheets. Given the very dynamic nature of construction projects, risk data collection is often out of date, and little or no time is spent on actually analyzing this data, and acting on the trends that the data is providing. Spreadsheets are time consuming to work with, prone to human error and difficult to manipulate and analyze. So risk management becomes a box ticking exercise not a proactive cost reduction exercise.
In addition, working with spreadsheets makes it almost impossible to aggregate dynamic risk data, which is vital in providing visibility of risk across all projects. For example a collective trend in incidents and near misses across projects clearly suggests that a risk event may crystalize in that area and requires prompt action.
If, in Carillion’s case, there had been the right tools and time to study cross-project trends, then the current situation might have been completely avoidable.
So in projects where risk is managed in isolation, there is no real visibility of risks and opportunities across all projects. This results in precious little real time for analysis of trends and warning signs. Risk events therefore, occur seemingly as a complete surprise with the end consequence witnessed in delays in completion and eventual payment.
We have been studying the impact of effective project risk management on the cost of projects with some of our customers, through studying the known costs of risks that had in the past been missed, versus those now being mitigated. Early analysis suggests that as much as 15% of all project costs can be attributed to poor risk management where risks were simply missed or there was no proactive program to mitigate the risk.
So when you consider projects where margins are as low as 3%, anything that can potentially reduce project cost by 15% seems highly worthwhile.
We meet many dedicated, intelligent and enthusiastic risk managers working on large projects, who have so much to offer but often lack the tools and recognition to really make a difference. Isn’t it time that senior leaders made more of their skills and recognized the need to embed the right systems and processes to help them to help the organization avoid Carillion’s fate?