There’s a lot of silliness currently being talked about building industry sub-contractors being left unpaid following the failure of building companies. Calls for builders to maintain trust funds ignore practicalities.
But let’s get one thing straight. Being left out of pocket through commercial failure goes with the territory of running any business. My company here and abroad would lose on average over a decade, 5 to 10 million dollars through lessee failure. So too suppliers to retailers, and retailers themselves through hire purchase failures, theft, unsold stock and so on. Publishers produce books which bomb, retailers buy a line of goods customers reject, and so it goes. No‑one is immune, even professionals when their clients go belly‑up.
Retailers, particularly fashion are committed to leases and are going over like nine‑pins worldwide, thanks to internet purchasing.
The failure of building companies in recent years has seen the media treat the directors as villains, as if they deliberately failed. The Mainzeal case specially irritated me, the directors quite wrongly being prosecuted for trading while insolvent. That was an absurd allegation. Here’s why.
In pricing a job, there’s an unavoidable degree of speculation about future costs. A quantity surveyor, indeed no‑one, can never know for sure what lies ahead. All sorts of impossible-to-anticipate things can go wrong, moreso when as with Mainzeal, the builder is dealing in very large construction projects over a several years construction time.
What went wrong with Mainzeal, Fletchers and others with their massive losses on large projects, was an unanticipatable building boom, driven by a dramatically improving economy and a huge surge in immigration. Thus the cost of labour and materials surged.
But what specifically annoyed was the ludicrous assertion that Mainzeal traded while insolvent.
A construction company, no matter how big, is not a capital business. It may own its offices or heaps of equipment but its principal asset is goodwill.
Periodically it may find itself, for the reasons outlined above, halfway through a large fixed price job it will plainly take a beating on. It deals with that by taking on further, hopefully profitable jobs and trading its way out of the losses, which is exactly what Fletchers, Mainzeal and others tried to do. Alas, the boom rolled on, until a point of no return in ever‑rising, unanticipatable costs.
Thus I believe the prosecution of the Mainzeal directors was an absolute disgrace.
Implicit in the functioning of a market economy is commercial failure, whether through misfortune, incompetence or competition.
If those things didn’t regularly occur the result would be a few massive corporations owning and controlling everything.
I say it again; the prosecution of the Mainzeal directors was a disgrace.
4 Comments
Implicit in your criticism is a tacit admission that these companies trade while insolvent all the time. If the rug is pulled out at an inopportune moment and a new rug does not appear within a favourable timeframe, the enterprise implodes and messy legal consequences ensue. Adding to this we are living in an age where ill-informed post hoc wisdom is at its zenith. In the IT world, software developers being judged on what it turns out that the client wanted, not what they asked for and signed off on, coupled with low quality business analysis where the client dictates what they think they want rather than their actual requirements being elicited and documented using traditional BA methods is causing very expensive mistakes to go live and very expensive remediation efforts and recriminations based on 20/20 hindsight to proliferate.
Yes Bob you are right. Building costs have surged over the past six years to a point where I doubt any sane building contractor would give a comprehensive fixed price. Not without a massive margin or “back door”. Or both.
The main contractor is always carrying the ultimate risk for the entire project, generally with less margin than the sub contractors.
The resentment that the directors of Mainzeal have had to endure is nonsense. As with others that have run into trouble.
A lot of this is down to the “risk free” world many believe we should be living.
That’s not correct at all the shareholder of mainzeal shiponed off all the profits as loans to his other ventures and then gauranteed he could bring the capital back – and told the other directors he would – but he didn’t and couldn’t.
The Government depends on other people taking the very risks it will prosecute them for should they fail. Moreover it will happily add to those risks through its own policies and practices.