In my dual capacity as an ADR practitioner and engineer, I have taken a particular interest in the events surrounding the Carillion collapse. I strongly suspect that the full ramifications of this event have yet to reveal themselves, hence me offering some initial thoughts on the collapse and also reflecting on the ADR and dispute resolution perspectives of a disaster that In my view can be likened to the 2008 banking crash.
The engineering industry viewpoint is very aptly expressed in the concluding paragraphs of an article published a few days ago in the online engineering journal, Infrastructure Intelligence. The last three paragraphs of the article read as follows: –
“Carillion’s downfall is also sure to lead to some debate in the industry about the most effective way to manage and run major construction and infrastructure projects, with many calling for a construction management approach where risk is more equally shared with project bank accounts and insurance supporting major schemes.
Rudi Klein, head of the Specialist Engineering Contractors’ Group, said: “Consideration now needs to be given to how public sector clients should be engaging more fully with the supply chain to mitigate risk in terms of the design, construction and longer term maintenance of projects and my view is that you’ve got to look at arrangements such as construction management where you can then engage people directly.
“We also need to look at more cost efficient processes that knock out waste in the delivery process and that’s looking at engaging people at the forefront through an alliancing arrangement where people are working together to achieve a common aim, which is the client’s success factors.”
The Association for Consultancy and Engineering chief executive, Nelson Ogunshakin, said that Carillion’s demise should be a wakeup call for the industry and the government. “In the long term, this is an awakening for major structural change in the construction industry,” he added. “The challenges of low profitability and negative cashflow experienced by the contracting sector confirm that the current procurement process is broken. A new business model, coupled with client leadership, is urgently required to make our industry fit-for-the-future and ensure we won’t experience difficulties with other major players.”
Wearing my engineering hat but with my dispute resolution skills very much to the fore I am currently chairing a joint task group between the International Federation of Consulting Engineers (FIDIC) and the International Tunnelling and Underground Space Association ITA-AITES, that has been convened to draft a new Form of Contract for Tunnelling and Underground Works. In this endeavour, the core principle is a balanced risk allocation regarding the subsurface conditions (ground, water etc.). This means that the risks related to the quality of the ground (how “easy” and how “difficult” the ground is to excavate and what support will there be along the line?) should remain with the Employer (client), while those related to production in any given ground (how fast can I excavate the “easy” and how fast the “difficult” ground?) should remain with the contractor.
In the case of Carillion, the concept of “balanced risk allocation” is far more complex. The main problem is the sheer size of the organisation. The number and size of contracts with the public authorities that are affected is such as to create a serious difficulty to the public because of the aggregate risk. It saddens me to read that a number of Carillion contracts will have to be renationalised: this is usually an enormous loss to the taxpayer.
As I understand it talks between the company and some stakeholders did take place before the collapse but failed. This means the interested parties negotiated but did not find a solution: possibly because they were not good enough as negotiators or maybe because the different interests perceived themselves as being too far apart and without external input, were unable or unwilling to try and reconcile with one another.
The number of employees that may be laid off as a result of Carillion is “impressive” not least because many may lose their jobs all at once. However, we must not forget the huge number of small(er) businesses that may fail. I see the loss of these businesses as equally tragic. Many of those affected may simply be cast aside by government agencies, banks and financiers and also by public opinion. In this regard I have in mind the comparison between an airplane crash (or a momentous event such as 9/11) and the high death toll on British roads every year: the first will understandably impact on public opinion, but the effects of the second are even more devastating.
Pending further developments and revelations, my biggest concern is not about any perceived failure to save Carillion and the effects on its shareholders, or even the affected employees and small businesses, but about the aggregate risk the UK government has taken on by seemingly “putting all its eggs into the same basket”. As a German professional might ask, “is it a problem of lack of competition or of too fierce a price battle in the public sector that leads to these ruinous situations?” Is undue weight placed on the price criterion in public procurement policy, due to former difficulties with excessively high prices because of procurement rules that previously were much too slack?
Governmental organisations and the engineering industry have to consider how to ensure that there will be no repetition of the Carillion disaster and if there is, how to ensure that the resultant damage can be mitigated.
First, there is work to be done on the procurement rules that safeguard the public interest (transparency, best offer, instead of lowest bid etc.). Then the control systems must be improved so as to ensure that early warnings are both given and heeded. Contractual frameworks must allow for measures to be taken to protect stakeholders and I reflect that, in a less “privatised” economy it is easier for public governance to keep control and to avoid catastrophic Carillion-like outcomes. Damage mitigation may come later.
In all these endeavours the art of positive negotiation with the aim of resolving conflicts of interest is of course crucial at all stages: definition and application of procurement policy, setup and use of the early warning mechanisms, introduction and implementation of risk mitigation measures and, hopefully seldom, failure prevention or mitigation.
Currently there are other scenarios in finance and engineering that could assume Carillion-like proportions, although perhaps not on quite the same scale. I strongly suspect that in these instances, such early warning systems as there are, are deficient and that any risk mitigation measures that are written into individual contracts are inadequate or nonexistent. This means that the first place (in order of time) to implement mediation concepts will be moments of bust, simply because any collapse will occur before better systems are created. In the middle and longer terms there should be negotiations on the introduction of warning and mitigation measures into existing contracts, while at all stages changes in policy (procurement and the balance between public and private operations) will require skills such as #AlbertSquareMediation offer.
In conclusion, as regards the Dispute Resolution process: first comes early warning, then dispute prevention through timely risk mitigation (and, where possible and adequate, risk reallocation) followed by dispute resolution. Once a problem the size of Carillion’s materialises, enormous amounts of money have already been lost. The options at that stage will be to prevent more damage (regardless of who pays), and allocate the cost as fairly as possible. Of course, these are noble scopes and certainly ADR is a good way to try and achieve them. The win-win that one not infrequently sees in mediation is unlikely but given that the parties involved will have a very large say in the process there is much more likelihood that they will reach a settlement that they are comfortable with and going forward that will be adhered to.
 “Carillion to go into liquidation after talks fail” by Andy Walker. 15 January 2018 – https://www.infrastructure-intelligence.com/article/jan-2018/carillion-go-liquidation-after-talks-fail
Switzerland-based mediator, arbitrator and engineer and a member of the #AlbertSquareMediation commercial team. In the course of his very distinguished career Matthias has gained considerable expertise in the fields of negotiation and contract procurement and management and is very well placed to comment on the collapse of this company.