Carillion - a little extra input

Couple of talking points keep coming up about Carillion. 

Firstly that contracts should not be awarded to the lowest bidder - they usually are not in the Public Sector, but are awarded on the basis of Most Economically Advantageous Tender, i.e. Value for Money.  Obviously price is a factor.

Secondly, sub-contractors accuse companies like Carillion of not paying promptly (Carillion seem to have used factoring of invoices, so that should not be a problem).  Public Contracts require contractors to pay sub-contractors within 30 days.  If they do not then a) the sub-contractor can charge interest at 8% above base rate (i.e. 8.5% at the moment) b) the public sector client can arrange to pay sub-contractors directly and c) late payment may be held against them as a reason for not allowing them to bid for future contracts (in extremis).

I'm not saying these are not problems - they are - but there are existing provisions that could deal with them if applied and enforced.

Carillion - public sector contracts

I am sure that there are going to be a lot of "hot takes" on Carillion going into administration.  It is too early for me to go into it in detail, but a couple of key points to think about.

1. Procurement has to look at Risk as well as price and cost - a consolidation of suppliers may lead to efficiencies but can also increase risk
2. Bigger is not necessarily safer than smaller.  Think also of Connaught and the hard work Serco have had to do to turn themselves round from a big operating loss.
3. Apart from banks no UK business is too big to fail.
4. Contract management is key for the public sector.  It ensures contractors cannot make up for underbidding by changes and variations
5. Buyers need to be very careful about possible underbidding (by SMEs and charities as well as big contractors) - companies need to make enough profit to ensure they survive when things go wrong.  And at some point they will.
6. Split supply may be safer, but less efficient
7. Privately owned companies are not perfect.  I know that is obvious, but it is not what we sometimes hear when we talk about private companies delivering public services.
8. Public sector contracts normally prevent suppliers from assigning contracts to third parties without the buyer's permission.  We hear the government as been ensuring that Carillion contracts can be easily passed on to a new contractor of our choice.  That is good news.
9. I would not expect many of Carillion's contracts to be re-tendered in the near future.  Short term continuity will take precedence over the need for competition.
10. This will look bad on the UK, as overseas contracts will also be thrown into disarray including work on the Qatar world cup which like all such projects is on a tight timetable.
11.Finally, spare a thought for the sub-contractors and suppliers.  They are likely not to be paid anything for a long time, and then be offered pennies on the pound.  It is likely some will go bust.  It is not their fault, nor (most) of Carillion's staff and I hope they manage to get through.

This is another major shock to Britain's construction industry (after the collusion prosecutions, and Connaught).  I hope it can bounce back quickly

Are there really opportunities for SMES in the public sector?

I've written before about the unresolved conflict at the heart of goverment procurement policy - the need to save money and the desire to inolve more SMEs.   It was always likely that for all the rhetoric, money would speak loudest, and government departments would look for savings by aggregating requirements rather than look to the longer term game of stimulating competition.

A couple of other blogs today have provided examples - my friends at Government Opportunities are pointing out that one of the Government's own working groups (on ICT) is saying that things are going backwards - see here.

Meanwhile over at Bdaily, they report on the North East Chambers of Commerce calling for the National Procurement Framework for construction to be scrapped because it would disadvantage North East firms without national reach - see here.

These issues get to the heart of the public sector dilemma - if Britain were a private company it would be able to focus on getting the best quality at the lowest price.  Public Sector procurement always has a broader dimension.  Realistically it always it will.  You can call for all decisions to be made purely on a commercial basis, but the Bombardier issue shows that people (and the media) are not happy with that approach.  And what Politician is going to willingly give up the lever of using public funds to create jobs (and votes) for their constitency?

It is always going to be a difficult balance, and we should expect Politicians of all flavours to tailor their proposals to their audience - even if it leads to inconsistency.  I expect cash savings to dominate for at least another year or two, and then as the clamour for action rises, the policy to be revamped to favour the broader agenda - just in time for the next election.