Reality Check #3
Risk Mitigation in Growth Markets
In 2014 We Cautioned…
“Our studies reveal a very disheartening fact: Success in the construction industry, even for very long periods, doesn’t guarantee continuing success. In fact, the study indicates clearly that every change in a successful organization, particularly growth, creates a period of risk in spite of all previous successes.” (Managing The Profitable Construction Business, Thomas C. Schleifer, Kenneth T. Sullivan, Ph.D., John M. Murdough, CPA, Wiley, 2014, Pg. 3)
In July, 2019…Planning and Construction News Reported…
On 4 July 2019, the country’s oldest building company, and the third oldest company in the UK still in operation, R Durtnell & Sons, ceased trading due to a consistently falling level of net assets.
“Britain’s oldest building firm, R Durtnell and Sons, has collapsed. The Kent-based firm founded in 1591 and run by 13 generations of the same family, started building in the time of Elizabeth I when it constructed timber framed houses. The business built Poundsbridge Manor in Kent in 1593 which still stands to this day. The timber-framed house was one of several built by family ancestor Bryan Darknal for Elizabethan merchants. The family remained as carpenter-builders until the 1800s, when Richard Durtnell bought a much larger premises. He set himself up as a general builder, and the business flourished until suddenly collapsing two weeks ago after 439 years.”
In 2014 We Cautioned Further…
“The events and decisions that precede a construction company failure take place during the one to three profitable years prior to the first year of breaking even or loss. Since many companies struggle through several losing years before failure, the time frame can be from one to four or more years prior to failure…A study of the events and decisions that caused hundreds of companies difficulties identified five elements:
- Increase in project size
- New geographic areas
- New types of construction
- Changes in key personnel
- Lack of managerial maturity”
In January 2018 The BBC Reported…
Construction giant Carillion is going into liquidation after its huge financial troubles finally overwhelmed it. The UK’s second-largest construction company buckled under the weight of a whopping £1.5bn debt pile.
Carillion employs 43,000 staff globally, around half of them in the UK where it does most of its business. It also operates in Canada, the Middle East and the Caribbean.
In 2016, it had sales of £5.2bn and until July boasted a market capitalization of almost £1bn. But since then its share price has plummeted, leaving it worth just £61m. What went wrong for the firm?
Some argue that it overreached itself, taking on too many risky contracts that proved unprofitable. It also faced payment delays in the Middle East that hit its accounts.
Last year, it issued three profit warnings in five months and wrote down more than £1bn from the value of contracts. This made it much harder to manage its mountainous £900m debt pile and £600m pension deficit.”
Awakening to The Reality of Growth Risks
Academics in the construction and engineering field have been studying the risks inherent in rapid growth and suggesting risk mitigation techniques for quite some time. The construction industry managers that I talk to every day have taken notice of risk research and have begun to implement some of the risk mitigation suggestions because the concepts make sense and they can see some of the risk elements in their own firms. However, the recent catastrophic failures of both the UK’s oldest and one of its largest construction enterprises demonstrates the threatening nature of poorly managed growth to all construction companies regardless of size or experience.
I will be watching as more information on the causes of these UK company catastrophic failures gradually comes to light and will share them with you here in future blogs.