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Wed July 18 2018

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MPs publish Howson’s defence

11 Jul Two months after a House of Commons joint committee inquiry published its damning report of Carillion and its directors, they have finally published letters setting out former chief executive Richard Howson’s defence.

Richard Howson faced the MPs' inquiry on 6th February
Richard Howson faced the MPs' inquiry on 6th February

Richard Howson, removed from the post of chief executive of Carillion in July 2017, appeared before the joint committee for questioning in February and has subsequently submitted several letters provided further details and clarifications. These include a lengthy letter sent on 10th April 2018 challenging statements that had come to be taken as fact.

In particular, he was concerned that the MPs had believed the testimony of Qatari developer Msheireb Properties over his own.

His letter is addressed to Frank Field, chair of the work & pensions committee, and Rachel Reeves, chair of the business, energy & industrial strategy committee.

Highlights include a re-assertion that Msheireb owed Carillion’s CQBC joint venture £200m in September 2017, when Mr Howson was pushed out of the company altogether and a detailed rebuttal of Msheireb's subsequent denial.

He also cites numerous press reports from reputable sources, such as Reuters, highlighting the difficulties that international contractors have experienced in getting paid in the Middle East in general and Qatar in particular.

Msheireb Properties had contracted Carillion in 2011 to work on a £4bn redevelopment of the centre of Doha ahead of the 2022 World Cup, which Qatar is hosting. Richard Howson testified before the joint committee of MPs on 6th February 2018 that Carillion would not have collapsed had Msheireb paid what it owed. “I felt like a bailiff,” he told the MPs, as he made six visits to Qatar every year “just to collect cash”.

Msheireb subsequently submitted its own evidence to the MPs, asserting that it always paid the contractors promptly and in full, “in accordance with the contract”. It said that any attempt to blame Msheireb for Carillion’s demise was “deeply troubling and inaccurate”.

The MPs chose to believe Msheireb. After reading its testimony, Frank Field said: "This extraordinary exchange reinforces the impression that the upper reaches of Carillion was stocked with fantasists. It takes a special kind of optimism…to classify money one hopes to earn in the future, on a challenging project, as money ‘owed’ to you. He cannot tell the difference between money he'd like to be paid, he wishes would be paid, and money that is actually owed to him.”

Rachel Reeves said: "The Carillion directors litany of excuses for the collapse of the company is fast unravelling. While spiralling debt problems and failing contracts signalled the alarm to almost everyone but Carillion's directors and auditors, their former chief executive was jet-setting off to Qatar to chase a pot-of-gold that may never have existed. Once again Carillion's directors appear to have shut their eyes and ears to the real problems at the company and failed dismally to take meaningful action to avert its tragic collapse."

 

Here we finally have Richard Howson’s response. He goes into some details, which is worth reproducing, given its significance:

 

“During the course of your inquiry into the collapse of Carillion plc, a number of pieces of correspondence and other documentation have been published on your website. In reading this material, there were a number of statements made which I do not consider to be correct. In particular, I would like to comment upon the points which have been made by Msheireb Properties.

“Given the degree of public scrutiny which has, quite rightly, attached to the circumstances of the collapse and the fact that a number of agencies are currently involved in investigating these matters, it is critical in my view that your inquiry has access to fair and complete information.

“In order to remain focussed on the key areas of concern and not to make this letter of unnecessary length, I have not taken issue with every point with which I disagree in the letters to which I refer (in particular the letter from Msheireb Properties, which calls for a more detailed response than I am able to provide here), rather I have grouped my responses to the letter from Msheireb Properties into 4 key points.

“I stated before your inquiry on 6 February 2018 that the Carillion-led joint venture delivering this project ("CQBC") was owed approximately GBP200m by Msheireb Properties at the point I left the business in September 2017. My letter of 21 February 2018 confirmed the exact amounts which Carillion had claimed were due. In its letter, Msheireb Properties denied this and claimed that CQBC was paid at regular monthly intervals from January 2012 through to January 2017 "without exception" (page 2 of Msheireb Properties' letter) and that amounts were released in accordance with the time period set out in the contract.

“This is simply not correct. The principal reason for my frequent visits to the site was the huge volume of design change required by Msheireb Properties, which increased the cost and caused delay to the project; and the serially late monthly payments, which CQBC experienced throughout the duration of the contract. Had we been paid in a timely fashion for the contracted works and the variation works which were requested by the client, I simply would not have needed to visit Qatar as frequently as I did.

“To evidence the scale of the non-payment problem with Msheireb Properties, I instructed the Carillion commercial team to run an exercise to calculate the number of days that Msheireb Properties were late in paying us. I understand that that exercise was maintained. It may assist the Joint Committee to ask for a copy of this document. From memory, as at the point when we were around 1700 days (i.e. 4.6 years) into the contract, Msheireb Properties had paid us around 1000 days late cumulatively in respect of contracted monthly payments. Following communication of this historic performance to Msheireb Properties, the timeliness of the payments from Msheireb Properties to CQBC improved until October 2016, albeit not the quantum owed.

“This does not also take into account Msheireb Properties' failures to properly administer on a timely basis (in accordance with the contract) variations and EoT claims (I referred to both in my response to the Committee and in my letter). For these reasons, I do not accept Msheireb Properties' comments at page 4 of its letter concerning CQBC's alleged "poor performance". Carillion and its supply chain used their own resources to a considerable extent to attempt to plug the funding gap and move the project forward, but when a contractor is left unfunded for a considerable period of time, wrongly, combined with a high level of change there will inevitably be an impact on the progress of a project.

“At the heart of the delay and non-payment issue was Msheireb Properties' failure to value and pay EoT and variations in accordance with the contract. The principal EoT 3 claims (EoT 3A, 3B and 3C (part)) were made on 31 July 2016, with a subsequent claim (EoT 3D) made on 17 May 2017, all in respect of time overruns deriving from design changes required by Msheireb Properties. As a result of Msheireb Properties' failure to value and pay this claim, CQBC and the supply chain had to fund their staff costs, plant and equipment from, I think, September 2013 to certainly until after I left [September 2017]. During this time, only one ‘on account’ payment was made against EoT3 for the very significant services provided, which was made in December 2016, in an effort, I believe, by Msheireb Properties to support and achieve completion of the contract during 2017.

“Msheireb Properties does not accept that it owed CQBC £200m at the point when I left the business in September 2017, stating that that figure must relate to work then remaining to be completed. This is not the case. The figure I gave and which I detailed in my letter in the main related to EoT3 and variations complete or in progress, which were properly claimed within CQBC's monthly valuation application under the contract, but which Msheireb Properties had failed properly to administer. In my letter to you of 21 February 2018, I set out the figures. In March 2017, from memory, around 90% of the works were completed. By August, when CQBC had left site, works were around 93%-96% complete (Msheireb Properties' figure was 96%, ours was 93%). Accordingly, their comments are incorrect and I remain of the view that very significant sums remained owing to CQBC in September 2017.”

Mr Howson also challenges the value of Msheireb’s professional advisers. He writes:

“Msheireb Properties' letter tries to argue that the amounts owed to CQBC were assessed by ‘independent’ and ‘reputable international cost consultants and quantity surveyors’. This is misleading. There were two consultants engaged by Msheireb Properties: (1) Turner International; and (2) Aecom. Turner International are, I believe, partially owned by the Qatar foundation (namely Msheireb Properties' ultimate parent and sponsor) and so are not independent. I believe the second consultant, Aecom, was independent but their advice was often ignored or overturned by Msheireb Properties. For instance, Aecom’s advice in relation to some of the variations issued by Msheireb Properties in the period up to October 2016, supported CQBC's claims which were paid by Msheireb Properties, but the advice was subsequently overturned by Msheireb Properties. This occurred even after Msheireb Properties had paid CQBC, who had then paid its supply chain, resulting in Msheireb Properties reclaiming payments made by deducting monies from subsequent monthly applications from CQBC.”

He continues: “To try and resolve these issues and to allow the project to move forward CQBC commissioned an independent report by FTi into the appropriateness of CQBC's EoT 3 requests. This report concluded that CQBC's EoT 3 requests were fair and that Msheireb Properties' assertions in many respects were unreasonable and flawed. FTi also reviewed Msheireb Properties/Turner's delay analysis and concluded it was severely flawed. We attempted to organise workshops in Doha with Turner and Msheireb Properties and CQBC flew FTi in from the UK so that they could discuss their conclusions with Turner and Msheireb Properties. The representative from Msheireb Properties either failed to appear for the workshops or left after a short time having been unable to offer any substantive response to FTl's points. You may wish to ask the Official Receiver for a copy of this report. I am also aware that CQBC kept a diary of missed, failed or shortened meetings throughout 2015, 2016 and 2017 whereby CQBC endeavoured to obtain the cash flows it was entitled to in order to fund progress and completion of the works.

“Carillion also sought in writing the assistance of a UK government minister to assist it with its negotiations with Msheireb Properties given the considerable amounts owed. The Joint Committee may wish to ask the Official Receiver for a copy of that letter.”

 

Mr Howson also gives more detail about the complexities of the job imposed by the client.

“There was an abnormal amount of change over a long period of time on the Msheireb contract, all driven by Msheireb Properties, ‘which was extraordinary even taking into account the scale of that project. This was in part due to Msheireb Properties changing lead architectural designers on two occasions and subsequently not having a lead designer on the scheme.

“I stated before your inquiry that Msheireb Properties issued around 40,000 new drawings. As I clarified in my letter to you of 21 February 2018, Msheireb Properties in fact issued 25,000 new or revised drawings but these drawings were inadequate and CQBC (and its suppliers) were then forced to produce approximately a further 38,000 new drawings itself to make MP's design workable. CQBC and its supply chain were obliged to provide certain specialist working drawings, but not to the extent they did, which was as a result of Msheireb Properties' inadequate and changing design. In its letter to your inquiry, Msheireb Properties took issue with that number, claiming that ‘there were a considerable number of variations on the project, although there were only 700 - i.e. 28% of the number that Carillion alleges’. This is not an accurate summary. I have since found a 10 May 2017 Design Summary, which provides further clarity on this issue:

  • Msheireb Properties has confused the number of new drawings with the number of changes on the project. As is evident from contemporaneous documents (see the 10 May 2017 Design Summary, attached), up to May 2017 there were 103,645 shop drawing submittals (from CQBC to Msheireb Properties), 41,992 shop drawings (from CQBC to Msheireb Properties),10,860 Requests For Information from CQBC to Msheireb Properties, and 33,217 'Issued For Construction' drawings or revisions from Msheireb Properties to CQBC (this figure is the original contract drawings plus new and revised drawings);
  • There were 7,738 drawings contained in the contract, a further 25,479 "Issued For Construction" drawings were subsequently issued, 5,878 were new drawings entirely and 19,601 were revisions;
  • CQBC and its supply chain then had to produce in the region of 38,000 new drawings itself to compensate for the fact that Msheireb Properties did not have a regular architect on the project to do this work (having previously stood down two architects). Such a step was completely unprecedented.
  • To give you an idea of the size of the variations, the first variation, Bulletin No 1 contained over 2000 drawings.

“The contract was not a design and build contract, meaning that Carillion was not responsible for the design. Instead, Msheireb Properties contracted to provide CQBC with a full working design from the commencement of the project. They not only failed to do this but also allowed significant and excessive change to prevail in an unmanaged and haphazard way throughout the contract, leading to significant cash flow challenges for CQBC. Had the project been 'design and build', then CQBC would have taken ownership of the design aspects. What was clear to Carillion (by Q2 2017) when we looked at the amount of change as against what had originally been designed (this is recorded in the design summary attached) is that the design can only have been between 17% and 23% complete when Msheireb Properties moved into the construction stage of their project. I have never seen this amount of change on a project in my 27 years in the industry.

“In their letter Msheireb Properties state that ‘When construction progress at Site reached a sufficiently-advanced state of completion, their construction supervision services (only) were removed, and a new Supervision Consultant was engaged. The new Supervision Consultant adopted a more flexible and proactive approach to the contractual review, inspection and approval processes, to the benefit of the Contractor.’ This is incorrect. I understood that Msheireb Properties replaced CQBC unlawfully with, CCC, with effect from July 2017, in breach of contract and despite the advanced state of the project at that time, the works have still not been completed.

“Msheireb Properties' letter in a number of places suggests that cash was in fact being passed to CQBC to fund the project and that Msheireb Properties voluntarily released and made generous and premature payments to Carillion to assist them with their cash position on the understanding that the works would be progressed. This is simply not correct. CQBC used various measures to try and avoid making actual payments and failed to administer claims in accordance with the contract. For example, I believe what Msheireb Properties are referring to by voluntarily releasing payments is payment of retention monies to Carillion. However, as the inquiry will appreciate, it is in the nature of a retention that the funds retained have already been earned by the contractor for historic works. This was therefore for work we had already done and was not new money. Further, whilst Msheireb Properties made advance payments these were made against on demand advance payment bonds provided by CQBC and the payments themselves were therefore of limited value, with the bonds unwinding progressively to zero over either the next 6 or 12 months of the contract.

“I am also aware from the annual Msheireb Properties CEO forum, which we attended along with the CEOs of Multiplex, Obayashi and Arabtec, that these other contractors experienced the same issues as CBQC. I would respectfully invite the inquiry to seek evidence from these companies, which I believe would validate the points I make above in respect of Carillion's experience in Qatar.”

 

 

MPU

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