Interserve joins the ranks of Carillion another outsourcer in administration and one must question why this has happened again?
The root cause of both failures may be founded on poor contract costing with margins insufficient to cover the corporate overhead costs such firms carry, add in debt charges and the pension liabilities and you cease to have a profitable contract. Then there is the contract risk on each contract.
Contract Costing and risk
We can assist service companies review their contract costings and review contracts to consider the key risk of each significant contract and the potential implication on your overall financial and reputational position.
We see large providers even in our own markets, especially Internal Audit, bid at unsustainable below cost prices that do not cover the direct delivery costs, let alone price in overhead recovery and contract risk. Unless there is a clear strategic rationale, approved at Board level, all tenders should be prices at the agreed minimum company recovery rate based on actual costs of delivery of the proposed contract.
Classic risk signs on contract costing:
Directors determine price without reference to costs of delivery
Contract costs are not calculated for each tender or bid
Contract value and day rates have not risen for several years
The company has experienced a net cash outflow in recent years
Company debt levels have increased
Elucidate Consulting can assist you with contract costing and contract risks reviews with all work subject to Non Disclosure Agreement's prior to commencement.
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