Helen Randall: Learning the lessons of Carillion

Carillion went into liquidation with £1.7bn in debt and casting uncertainty over 450 public sector contracts. Helen Randall suggests local government might look again at the way it selects providers while customers should focus on their due diligence before filling the gap left by the collapsed company.

Having negotiated contracts with Carillion and other major contractors for public services since the mid-1990s, I have been reflecting on what lessons good and bad we can learn and how the public sector’s procurement processes could be improved.

Carillion had expanded beyond construction to services: facilities management, grounds maintenance even the legal services and IT.

Of the major contractors in the public sector marketplace, Carillion had developed one of the most sophisticated approaches to bidding, so it was perfectly placed to win opportunities for PFI/PPP and Building Schools for the Future contracts which combine construction, services and finance.

Quality and price

Most PFI contracts were evaluated on a 60% quality, 40% price basis. It is now alleged Carillion’s bids may have been dangerously low because falling profits made it desperate for new revenue. However, if a public authority has applied an evaluation ratio where price represents anything more than 30%, then inevitably price will always trump quality. Moreover, public authorities may only reject the “abnormally low” bids, and even then only after they have taken the trouble to clarify them.

Often even after evaluating with a scoring mechanism weighted in favour of quality, if all bids have met the authority’s minimum quality threshold, the contract gets awarded by default to the bidder with the lowest price.

As we have learnt from Carillion, in the long-term the public sector incurs cost if its private sector contractors fail because a contract is not sustainable. So it makes sound financial sense and is value for money to ensure appropriate emphasis is placed on quality (70% plus) when setting evaluation criteria and sufficient time is set aside to probe the financials behind the bid rather than rushing to close negotiation and award the contract.

Prophets of doom

There is also an issue about competition. Where tendering a big contract in separate lots, it is possible to specify that a tenderer cannot be awarded more than a certain number of lots in order to ensure market spread and increase resilience. However, where opportunities are tendered by separate authorities, you cannot rule out the contractor on the basis of their market dominance. In fact, the standard selection questionnaire actively disadvantages providers who are start-ups or new entrants.

If we genuinely believe more market diversity is important to strengthen competition and ensure resilience, then we have to be more adventurous in the way we select providers and change the questionnaire and shortlisting criteria.

Most PFI and PPP contracts had to be let on standard terms and if the authority wanted to vary the terms, their lawyers had to plead the case with government. As PFI progressed, the contracts became more sophisticated, but in my view, the standard terms should have incorporated better early warning mechanisms and more transparency for the public sector.

The Carillion scenario reinforces the importance of a robust contract and retrospectively vindicates some legal negotiators such as myself, previously characterised as “prophets of doom”.

Currently, Carillion’s public sector customers will be negotiating with the parties now in control of the contract whether the liquidators, Carillion’s subcontractors (who may be employing the bulk of the workforce) or the new contractor who has taken over the contract. Some authorities are considering bringing Carillion contracts back in-house.

Now is the time to look before you leap. In particular, it you will need to conduct due diligence to minimise the costs and liabilities which may be passed back to the authority. Your due diligence should cover staff, pension payments, transferring contracts, assets and intellectual property rights. Only when the full extent of the transferring liabilities are understood, should you negotiate the terms of the deed of novation or variation.

Helen Randall, is a partner at Trowers & Hamlins LLP