How Contract Reviews can increase Profit Margins

Construction contractor’s profit margins are notoriously low, and are touted to play a huge factor in the uncertain financial environment facing even the biggest, most-established firms.

But why? And what is the impact? A relevant example of this - the collapse of UK contractor Carillion. Carillion were a multinational company, winning huge amounts of work and often in the public sector but in 2018 fell victim to ‘the largest ever trading liquidation in the UK.’ So what went wrong?

A subsequent parliamentary enquiry conducted in the UK the directors of Carillion and media commentators alike, blamed the company's collapse on problem contracts (including two hospital PFI projects – in Liverpool and Birmingham – with cost overruns). A quick google of Carillion and what happened will provide similar results…problem contracts, delays, costs blowing out with timelines and disputes resulting in withheld funds.

So what does this have to do with tender/contract reviews and profit margins?

Well in the case of Carillion as demonstrated – the myriad of problems can be summarised into poor tender negotiation, elimination/magangement of risk and poor contract management. Projects were destined to have problems from the start as the planning wasn’t there, nor the contract management as these problems emerged. Much of this could have been avoided with robust tender reviews provided by those with adequate expertise, and then followed up with contract management systems, processes and dedicated staff.

The profit margins Carillion predicted of these contracts were never actually possible as they had not properly identified the risk from the outset and/ or put proper systems/ companies in place to manage these risks.

So, what’s the moral of this story? Tender Reviews may seem like an additional or time-consuming step but in reality, without doing this thoroughly the entire contract is built upon unstable foundations – or profit margins!

Additionally this job is often given to those who have another full time role to perform and who have core competencies in many other areas – just not tenders and contracts! If you want to discuss your tender review process or get some info as to how we could help, shoot me an email at [email protected].