Challenges for Construction Contractors Operating Across The World

01 March 2007

Frank McCormack, head of legal services, Balfour Beatty plc

Over that period many companies which would have been identified previously as worldclass, international contracting companies have disappeared. They may have disappeared through takeovers, through changing sectors or, regrettably, becoming insolvent. Those who identify the current era as a time of boom quite rightly focus on the significant developments of infrastructure: exciting building projects, the demand for better-quality education and health facilities and basics of life across the world. In the developed countries we have had to face up to a significant issue: the recognition that much of our transport and utility infrastructure has become inefficient through age or worn out through overuse. The challenges we face in improving these dilapidated, exhausted facilities from present condition to what is acceptable in the modern world – by providing the high standard and availability of modern facilities and thereby meeting changes in technology – have tested our industry sector in a number of ways.

I think it is a fair observation that lawyers have played an important part in meeting these challenges while still securing a profit. The in-house lawyers embedded within those businesses play a significant role in protecting such businesses from untoward risks and in meeting the exacting standards applied to modern businesses in nearly all territories around the world. At the same time the schedules, complexity and innovative funding of such projects also require support from lawyers based in professional practices.

UK-based International Construction and Projects

The senior management of Balfour Beatty has adopted and followed a strategy to keep its business description and the business itself as a construction group. While there are many aspects of our business that take us into wider fields, we recognise that the disciplines of our core areas of activity are those that have made the Group strong. We resolved to maintain a determination to operate in such a way that the quality of our operations would lead to a standard of profitability which was not generally found in construction contracting entities.

Based on this successful core business we would look to expand, taking the benefit of those skills and developing into other areas that we anticipated would be related to some extent to construction or construction management. Using this philosophy we have now established businesses in the four main sectors of building and building services, specialist engineering, rail and investments. Until very recently all of our investment strategies have been closely aligned with opportunities for construction.

We have remained UK-based and the majority of our business is still in the UK. We do not, as a matter of course, any longer undertake ‘expeditionary’ construction projects in other parts of the world. Thus our international businesses operate in selected locations where either we have a strong presence through a locally-managed, partially locally-owned entities or in territories where we have considered it appropriate that our key skills, particularly those which are in specialist areas such as foundation technology or railway technology, are going to be appreciated and make our insertion into that territory a profitable one.

We treat the US as a second domestic market. Unlike others, we view both the UK and the US as mature markets that have opportunity, where a contractor is prepared to invest in quality, safety and the use of modern systems, to enhance profits beyond a previously acceptable very low percentage of turnover. Sometimes our outlook is readily described as ‘cradle to grave’, where a contractor is willing to take on construction and carry-through management, maintenance and organisation of a project for 25 or 30 years in the same way that a government entity might have done previously. Or it may be that there is a financial structure such as the PPP (public-private partnership) that provides the structure for such arrangements. In either case the provider of the facility is looking for long term commitment and quality from the contractor. We have sought to respond to this aspiration and hope in this way to continue being able to select and negotiate projects which are suitable, interesting and high quality rather than just fighting for scraps in a volatile, hard-bid arena. We are succeeding in convincing customers that they benefit from this improved process; and much of our work in both countries is on the basis of repeat orders or framework contracts where we are seen as co-operating in projects.

Growth of PPP

Following success in the UK, other markets are seizing the opportunities that come with PPP. In several countries of the Pacific Rim legislation has been enacted to allow what would previously have been exclusively government procurement to be passed to the private sector. In Europe the opportunities are being taken up but not, as yet, in such a wholehearted way as found in the UK. In Sub-Saharan Africa and South America such possibilities are being developed where international consultants recommend private finance partnerships to assist cash-strapped governments. (The big issue here being the commitment of such governments to payments as and when and to the extent required by such long term structures.) In the US, Canada and the former Soviet Union there has been much desire to seek the opportunity for using public-private financing and though legislation is slowly being put in place to accommodate this there is a distinct lack of appetite at the regional governmental level for making such commitments. Outside the UK, Australia and New Zealand have taken such projects further than anyone else.

This style of project brings with it the need for understanding financial modelling and long-term risk, and the ability to procure the facilities management and maintenance contracting that will make the overall project successful. Very often such issues are alien to or not believed by many middlerange or small, local contractors. European/ UK and Canadian contractors who have developed expertise in this area do provide an opportunity for government agencies to have confidence that the system works.

Major Issues Affecting Corporations and the Need for Legal Support

The standards of behaviour of corporates, whether involved in PPP or not is the subject of public scrutiny. Major publicly listed companies are generally under a very powerful spotlight, irrespective of the jurisdiction in which they were established. In our industry there are a number of particular issues that take time, finance and commitment to manage, particularly from the perspective of company employed lawyers.

Of primary importance for my company, in an industry which has in the past suffered from a poor reputation in this area, is the safety and well-being of those who work for us, those for whom we work and with whom we contract and the general public. We have set ourselves the objective to meet standards higher than are prescribed by relevant legislation. This means that we have to live the quality systems and training which we put in place. As a management team we have tried, at every turn, to encourage all our employees to insist that strict standards are applied in their area of the business.

We have made it clear that we see this as a moral responsibility, no less important than keeping compliance with laws. We believe that the efforts we make to improve standards of safety across the Group assist in improving our profits and maintaining our reputation in the industry and the wider community as a company that cares about the effects its activities may have on the well being of others. We also believe this encourages the best people – those we believe we need to run our business profitably and effectively – to join us because they will feel they are safe working with us and share our outlook. We have gone on record as saying that we believe the industry as a whole is not trying hard enough; our aspirations are that higher standards can be maintained. This is an area that allows legal advisers both inside and outside the company to be used advantageously in training and protecting employees, advising the company on how it can fulfil its duties safely and effectively, while at the same time maintaining a profitable activity. We also look to our legal advisers to help us, where failures occur, to identify problems and move the business towards improvement rather then defending the failure at all costs.

The environment is a similar case in point. It is possible for contractors to be thoughtless about their activity and the impact they have on the wider community or directly upon neighbours. Again we find that efficiency benefits from taking careful consideration of the environmental impact that our activities may undertake. We also find that employers and project planners are open to hear about opportunities to fulfil the project’s objectives in a way which has less adverse impact on the environment. Consideration of the environment does not mean focussing on the physical activities that we carry out. We also look to spread, through project and group community programmes, the widest understanding of how working with renewable sources of timber and other natural materials and considering at an early stage the most energy-efficient way of dealing with a project can be an advantage for the wider community. Our legal teams again come to the fore in helping us to structure contract processes to implement these projects.

Responsibility in the Community

Corporate social responsibility guidelines are a key part of every company’s constitution in this modern era: alongside environmental concerns, we must carefully consider our direct responsibilities to employees and those for whom our projects are a source of income and livelihood. We look to opportunities for providing those who may be affected by what we do with an opportunity to change how we might carry out our activities. Equally, we seek opportunities to develop relationships with communities where we work and with those upon whose efforts we rely.

Every company – whatever its size – that operates through capital markets in the developed countries is expected to set up and maintain standards of corporate governance which make tough demands on its businesses and its employees. The introduction of formal requirements for reviewing risks before projects are initiated (even tendered for) provides an opportunity for companies to seek to carry out their activities without undue risk for employees, stakeholders and the public. Failure to apply such processes is just not acceptable with consequent impacts for liability in the event of failings and for reputation of those businesses. This is particularly true for construction related businesses and all pre-operational aspects from design engineering to safety or environmental risk assessments.

When reviewing these areas one understands the impact that can be made by a corporate officer who is aware of the impact of legislation, the need to comply with prescribed regulations and the understanding of how the company’s reputation is affected by the manner in which it demonstrates compliance. This will involve working closely with the commercial leadership, the company’s PR experts and the functional specialists in the relevant area (H&S, environmental etc).

New Legislation

Of similar impact to the management of corporations is the ever increasing amount of new legislation being enacted in the UK, Europe and the USA. The flood of invasive provisions brought in over the last ten years shows no sign of letting up and continues to challenge those who manage businesses. Many of these provisions are enacted in response to events – there are significant bodies of law in many developed countries in the aftermath of the terrorist attacks of 9/11. While the principle of procuring security assurance for the populations of our countries is understood, some of the new provisions seem to business managers to be only tenuously related to protection from terrorism. In a business like ours the need to comply is absolute; the massive task of understanding where, how and to what extent we are involved in delivering compliance has created issues as varied as limiting movement of personnel and required authorisation to procure materials.

Another area which has generated legislation is the aftermath of much publicised scandals that have shocked Government and the public. The run on from the Enron failure is continuing to affect business practices and will be likely to have made a permanent mark on developed countries’ approaches to commercial practices. The same attitude arises by reason of environmental incidents or occasions when criminal or negligent activity creates public demand for governmental action. In many cases the businesses affected have also been shown to have allowed failings to occur which demonstrate breaches of company procedures and policies.

Both terrorism and business compliance legislation has created a mass of regulation which, whatever the previous behaviour of companies, has required further application to the task of compliance. It has also allowed governments to support the aggressive enforcement of investigations into failings and to seek the imposition of significant sanctions – sometimes with terminal impact for a business. Those in positions to help companies with legal evaluation of the issues and/or investigations, are often forced by the overwhelming power of the investigation to accept culpability whatever the rights or wrongs of the situation.

Selection of Advisers

As business life becomes more complicated in the international arena, the need for specialist advisers in the areas where a company has to meet certain obligations is apparent. Also apparent is the understanding within the company, usually focused through the in-house counsel, of the many areas and matters where specialist legal help is difficult to find.

Companies seek to employ outside lawyers who have demonstrated a likeminded approach to the strategy that the company is following and who see it as their role to provide support for that approach. Generally they also seek where possible to find opportunities for improving the company’s opportunities and reputation.

In terms of selection for particular jurisdictions it is my company’s view that the selection of local counsel with in-depth knowledge of the system in which we hope to do business, but at the same time understanding what steps need to be taken for the protection and safety of individuals in the business, is very important. Most of the work that is placed with outside firms tends to gravitate to the same firms, because once the model has been tested it is familiar to our people and those with whom we work. We, as a low margin business in the majority of our business areas, are finding that the need to incur the increased cost of detailed, specialist advice has created a change in our business model to reflect these increased costs of doing business. This means that our selection and use of legal advisers is now as keenly assessed as the detailed engineering input or the cost and quality of materials. The approach we take also has to be as flexible and innovative as our search for new construction techniques. Our legal advisers need to know as much about us, our people, business models, business strategies and products as they do about legal practice in their jurisdiction.

The Future

Business life for companies like Balfour Beatty has changed out of all recognition, compared to the way we behaved 20 or 25 years ago. The need for interpretation of legal provisions for directing the company’s strategy and for marshalling its preparation to meet modern demands involves its in-house and external legal support in many areas wherever we work in the world. As we continue to want to demonstrate our aspirations to be among the most respected companies in the world as regards employees, customers, shareholders and all other stakeholders, this effort will continue.

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