EP 148

Paul Heming: Hello and welcome to episode 148 of the Own the Build podcast with me, Paul Heming. Again, today guys, I’m sharing a final account statement template in the show notes. If you are getting towards the end of your project for any given subcontract package, that attached template will be very useful to you. In the studio today, we are joined, or I should say rejoined, by someone who was on the show before. We’re joined by Mike Wharton, who is CEO of Complete Roofing Systems. Mike came onto the show on episode 113. It was our most popular show to-date. So if you haven’t listened to it, what are you playing at? You should go back and check it out. At that time, we were talking about almost like getting inside the mind of a subcontractor, like what goes on when they receive tenders and so on. Really, really interesting. And Mike’s journey actually from equity analyst and fund manager to CEO at a roofing subcontractor or specialist contractor, as he’ll probably scold me for not saying, has been really interesting and, I think, puts Mike in a quite unique situation. As always at the start of the show, I’m getting a bit carried away and blabbering on a bit, but Mike, welcome back to Own the Build. How are you?

Mike Wharton: Very well, thanks Paul. Yeah, good to be back.

Paul Heming: No, the pleasure is all mine. And we’ve been communicating, haven’t we, back and forth. I think it was back at the start of this year when you and I first sat down for episode 113 and we exchanged emails back and forth, don’t we? I don’t know, once a month or something like that. Just keeping up to date. And you emailed me almost a month ago to the date saying, hi Paul. The financial squeeze in the market is now well underway, due fancy having a conversation about risk reduction in contracting. Well, we are here today because I did fancy to have that conversation. Just explain to me what it was that drove you to sending me that message and why you thought it was important to come and have a conversation.

Mike Wharton: We just had an issue with a potential client actually, and again, it is on this overall subject that’s very close to my heart about reducing risk. It was a main contractor that was new to us. So potential new client, I say potential because they’re not going to be a client ultimately. We’d priced a job, won the job, and we were in final contract discussions and the contract terms essentially, they weren’t prepared to have a discussion about some of those terms. It was a case of our way or the highway. So it was really straightforward. We just said, we are not prepared to work under those terms and take all your risk. It’s not proportionate, you’re just pushing it downstream. It’s not for us. And their answer was rather arrogant, well, we’ve got to mirror what our client wants. And I just thought, well that’s your job to talk to your client to mitigate that risk and work with your client collaboratively. That word that we keep hearing that’s just so misjudged and misplaced often at the moment. So it really came from that, it was a case of this is a real situation. We predicted that there was going to be a big squeeze. We knew what was coming. Main contractors are scrambling for work. It’s competitive. There is this perpetual cliché, you know, the race to the bottom, etcetera. And the specialist sector is in a different place. The specialist sector’s strong and the work can’t be completed without us. So specialists need to push back and a lot of them don’t do that.

Paul Heming: Yeah, well I mean it’s funny, isn’t it, because I remember and you know, reflecting on episode 113 and that episode was all about how you manage the tender process, right? And like what the red flags are for you as a subcontractor and trying to illuminate main contractor QSs, project managers in how you get the best out of a specialist at that stage. And I remember you telling me, and I as an ex subby myself know of this, that a very similar tale. You were saying that there was a contractor that you had gone all the way through the process with, you’d almost value engineered their job through the tender phase with them. And again, got to the point where got down to talking about the contract and just for want of a better phrase, we’re putting heads. And there was no movement from them on things that you thought you were being relatively pragmatic and reasonable about. And this sounds like an identical issue again. However, maybe the difference here is that it sounds like your potential client, the prospect was saying in our main contract, which we have already signed and we’re already working to, these are the T’s and C’s and we can’t accept that we carry the risk. We as a collective need to carry the risk and therefore you need to have it. When you spoke to them about what was in their main contract and you saying that you didn’t think it was proportionate, what was that reaction?

Mike Wharton: There was a really aggressive reaction actually from the MD of that firm. So, fairly senior person within it saying, well, you must understand that we must reflect our risk with your risk. But the issue is really straightforward. There’s an upstream client of them, you know, normal main contractor type scenario. That client has their own architect who had designed a building and the roof system and we’d priced it on that specification. And when our order came, they expected us to take design liability for that roof. Well, we haven’t designed it, it’s very straightforward. We haven’t designed it, so how can we take liability?

Paul Heming: Was that not discussed during the tender phase?

Mike Wharton: No.

Paul Heming: Wow, okay.

Mike Wharton: No, it was a design and build from their end. You know, we didn’t know that at the time. It was just a case of, you know, we’d like you to look at this project, which we had. We’d already been through the value engineering process with it, which is why we were in the lead for it. And we just said, well, how can we take design liability when it’s not our design? And it was a very aggressive answer to say, well, you are the expert, installer, specialist, et cetera. Surely it’s part of your deal that you will do that. Well, if we had have specified the job then yes, we would’ve done along with a relevant manufacturer. But this was something that was designed by a third party and you know, our PI is such that in the event of an issue, I wouldn’t imagine an underwriter even paying out under those circumstances when we hadn’t actually taken on any design ourselves. So the whole thing was pretty ridiculous.

Paul Heming: You talked about the fact that you had value engineered, you’ve invested a lot of time on that project, a lot of resource, a lot of heartbreak and sweat goes into a tender process. Everyone listening knows this. It’s not easy, is it putting together a tender in the first place, then negotiating it, winning it, charming it, and then getting to that point, why did you, and I think I know the answer here, Mike, cause I’ve gotten to know you over the last few months, but how did you walk away as a team? Because I’m guessing you in the position of CEO would have your perspective on it and perhaps that conversation with that MD turned your opinion. But it’s quite a difficult thing at that stage once you’ve got an order there just staring at you with the number on it and everything that you’ve worked towards for x number of weeks, months to get to it. How do you as a team collectively walk away from it?

Mike Wharton: I suppose that the key bit is the team element dealing with the contractor in question that’s very straightforward. When it gets to the point of, unless you agree to this, we are not proceeding with you. It’s a very simple request to our commercial manager to say, please write back and say thanks, but you can proceed with somebody else. You know, no problem. The harder discussion is with the team who have put, you know, heart and soul into some design elements, discussion, you know, long distance travel meetings, all that sort of stuff, and building relationships and trying. But I think we’re at the point now with our team where they have a really strong understanding of risk. They all know where our, certainly our ops team and finance team, they’re all well aware of where our bias clauses and red lines are, you know, lines that we won’t cross. I should rephrase that lines that we might sometimes cross depending on the circumstances of the job and the financial elements of the job. So that said, it’s still a difficult discussion to say, guys, I know we’ve won this, but we are going to walk away from it for these reasons. And of course there’s disappointment, the disappointment from me, disappointment all around. But there is an understanding of the reasons why and it’s a case of right, you know, onto the next and we’ll try and mitigate.

Paul Heming: Confidence in your own, self-belief that we said that was a red line. Just because we’re now in this position doesn’t mean we should no longer consider it a red line. This is who we are, this is our belief system. Let’s go forward on that.

Mike Wharton: One thing though, Paul, if I may, is that one thing that we do, if this is a job that’s been brought in by a BDM and we decline to do it and we’ve won it, we still put that amount towards that BDMs figures, even though we’re not actually delivering it because we don’t want that person to be disappointed. And so, well the firm’s walked away, I’ve lost out kind of thing.

Paul Heming: Yeah, it’s difficult, isn’t it, that, to manage that relationship and like the dynamics of that playing out. So, understood. I guess another question that spring to mind, I haven’t even got to my first question here, Mike, and we’re already 10 minutes and this is what you do to me, but it’s good. If you were to go back to that main contractor and say, if you’d operated in a different way, we’d have signed that contract and blah-blah. Like how could they have operated differently? You talked about that design liability as the standout thing. I’m sure there was many other things, right, when you’re negotiating, but that design liability, it strikes me as a person who has done a lot of procurement, who cares deeply about procurement, as sad as it is, that as a minimum, so A, should that be in this person’s package, yes or no? Maybe it’s gone in for ambiguity sake or just to try and shoehorn it into your package, which I’m not saying is the right thing to do, but as a minimum it strikes me that it’s completely counterproductive to put that into your package after you’ve agreed a price. So how did that come about? Because it must’ve been a complete slap across the face really, to have everything signed and sealed and then they say you’re expected to do this.

Mike Wharton: Yeah, it’s a good question. There’s a procurement problem here. So our potential client in question didn’t have either a letter of intent or a final contract from their client, even though they were the only main contraction in the running for the job and for various boring reasons, time was the biggest reason. But also an infrastructure issue is a secure infrastructure project, so there is a sensitivity surrounding it. They weren’t aware of certain aspects now, but the problem starts right there, you know, and given the main contractor’s world of an approximate 1.8% margin, etcetera, and the difficulties in the financial markets, etcetera. One of the biggest issues is that the client at the top is saying to, if they’re an experienced construction client like a university or a large infrastructure government, etcetera, they will say to their lawyer, protect us at all costs on this project. And usually that lawyer is not a construction related lawyer or with experience of construction operations. They may be involved in construction in some way. So they then pass that contract to the main contractor. And there isn’t the pushback. There should be pushback from the main contractor at that point with their client, but there isn’t because they’re so worried at the moment about losing that customer or not winning the work because they need that churn to for cash flow purposes that they’re signing up to essentially pretty much anything that therein lies the issue. And then they try to bully the subcontract chain and say, you need to agree this. Well, actually, do you know what? We don’t.

Paul Heming: And that is absolutely fair enough.

Mike Wharton: You really don’t.

Paul Heming: And let’s talk about the market briefly then because you touched on it there and you touched on it at the start of the show, the difference between how the main contract market is feeling and the subcontract market feeling. We’re talking in Q4 of 2023 here, and things will move and change depending on when you’re listening to this, right? But Q4, 2023, there has been some talk of it being a subcontractor’s market right now. Is that something that sits well with you in terms of how you see where things are at now?

Mike Wharton: No. It doesn’t sit well at all. Actually, Paul –

Paul Heming: I’m surprised.

Mike Wharton: I don’t think it waxes and wanes like that. You know, our interest is in the market as a whole, whether that’s the client and main contractor or end user, you know, and where we sit with that and you know that you’ll be well aware. I know of the email that came from Visory group about this, the 10% requested reduction, etcetera, and the comments that were made by their CEO about, you know, the subcontractors have had their time, now we’re having hours. It’s not about that. You know, construction is an industry which relies on a number of different parties doing their bit, providing their expertise and delivering right from the architect designing to the management of the overall to the subletting of packages to the actual physical delivery of the work and the expertise and competencies required to do that. So the whole industry is still in this phase or constantly in this phase of confrontation. And it just doesn’t need to be, if everybody is considering their own risk profile, but also thinking how do we safely deliver this work with our supply chain, then that leads to pragmatic, sensible, calm, onward discussion. And the main contractors that we do work with, they absolutely understand that, and it does work extremely well. And they do come to us in design stage and they do help to mitigate those issues because of those things. There is still this sort of, you know, Trumpian wall between certainly some tier ones and specialist supply chain who will say, oh, well we’ve got a supply chain of 5,000 subcontractors somewhere will sign that contract. And the sad thing is that they’re probably right. But as those firms start to get whittled down and some go bust, you know, both upstream and downstream in the chain, the management of that risk needs to be right there. It’s not that we’re trying to be deliberately awkward, you know, we want new clients, we want to work with people, we want to deliver financial success for the team’s success, all those good things. But there is still an absolute lack of real working together, so prevalent in the industry, which again, it leads us down our risk management element, which I know you wanted to ask me some questions about where just what do we do about those situations? If those clients are not willing to manage it at their end, then they force us to manage it at ours.

Paul Heming: Yeah. Well I think, and actually perhaps this is a good place for us to go to the break because I wanted to ask you how you manage these risks with the client, but what you said at the top of the show is almost that you wish that the main contractor was doing that with you as like that, not that you were in like cahoots and doing it, but you kind of feel like this is something that should be up the line so that we are having a more sensible, pragmatic decision about who is managing the risk down the line. But let’s do that right after this break.
What I very much enjoy about our conversations, Mike, is your grounding in risk and how you profile risk in your mind, in your business, etcetera. Right? And my feeling about that is that it comes from your background in being that equity analyst fund manager and looking at risk in that way. We talked about risk management and how you are currently managing things now with the environment as it is, many contractors going into administration. A prominent example in recent months being Henry who, I forget the number, but it’s in the hundreds of millions of pounds worth of supply chain retention, payments outstanding, etcetera, that just isn’t going to filter down now to those subcontractors whose money it rightfully was. My question to you is how are you managing risks that are present in today’s market, i.e. that kind of Henry Construction kind of a risk?

Mike Wharton: Yeah. Okay. So that for us starts with the financial piece and we have a number of tools so that starts at its very basic level with credit agency checks. Which yes, they’re a snapshot in time. That snapshot is usually some months ago, you know, a number of months ago, but it could still give us an approximate idea of what’s happening. If that check is pretty good, you know, we’ll proceed and price the work, and then at the point where it’s looking like we’re going to win, then we’ll go for a trade credit insurance limit on that particular project on that firm. If we’re working with the firm on a number of different projects, our finance team will just keep in touch with the credit risk insurance underwriters and say that we’ve won another job with X, Y, Z contractor or client or whoever it may be, end user as well, obviously. And they will look at that and up the limit. Occasionally what happens is we’ll have an alert where they’re dropping a limit on somebody. And that can be as simple as they haven’t filed their figures yet, they’re not late. But credit risk agencies do not like people filing on time. They expect you to file months and months in advance of the actual date.

Paul Heming: Yeah, well you do get given a fair old whack of time, don’t you?

Mike Wharton: Yeah, you do. You do. But there are lots of reasons why you wouldn’t file till the very last minute. So that’s a big issue that we will take forward with our finance team. Now when we get a reduction, we ask why has there been a reduction?

Paul Heming: To the –

Mike Wharton: Underwriters, yeah. Well, we deal direct with an underwriter. We don’t go through a broker. And they’ll say, ah, it’s because, you know, they’ve only got six weeks to file their figures and they haven’t filed them yet. Okay, well, you know, does that expose us? That’s the first question. Does it expose us in terms of the cash flow of these jobs? If it doesn’t and the applications have been made and the invoices are there and etcetera, then we’ll probably just let it ride for a while and just see what happens. If it does affect us, there will be an immediate call from our finance director to their finance director, very friendly, to say, look, you’ve been down downgraded. Because they’ll know, they will know at that point you’ve been downgraded talk to us, we’re working with you at the moment, you know, tell us why, tell us what’s going on. And it is as straightforward as that. There has to be pragmatism and there has to be individuals that are prepared to be very candid with one another to do that. You know, we’re in a society now where lots of discussion is not so candid, but we remain in an industry where those candid discussions absolutely have to happen for the protection of all the parties.

Paul Heming: What’s the typical response? I’m guessing there’s a range when that happens, but is there a good response or bad response? Does sometimes people think, what on earth are you doing calling me about this? This doesn’t usually happen. Like how does it usually go?

Mike Wharton: If it’s a really large firm, a PLC or, you know, something very large. They’re used to it because they’ll know already because they’ve got, you know, credit limits with their suppliers and someone really sharp when that lands will have picked the phone up instantly. So they’re used to that and they’ll say, ah, it’s because, or we’ve had this issue, or this has happened, or our figures show an extraordinary item where they’ve written off a hundred million and because we’ve got really strong financial expertise in our firm from RFD to me as well with my experience, we can look at that and say, actually, yeah, that’s absolutely fair enough. But again, if it puts us at risk, our attitude will be a little bit different. We might say, well look, in the sequencing, the program of this job that we’re on, it’s a million pound job. We are due to get into the third phase or whatever. When the materials land for that, we will vest them with you, but we won’t paying within seven days and there’ll be a –

Paul Heming: Really?

Mike Wharton: Oh yeah. There’ll be a negotiation at that point. Absolutely. Yeah.

Paul Heming: But I’m guessing you flag it with the FD and then in some way it finds its way into the commercial or project team level from there. But that’s just a simple example of, and you know, just a sensible way to run your business, particularly in this market, right? But actually in any market, we know what constructions are like, tight margins and so on of my money. Cause that’s almost the game, isn’t it, with subcontracting. My money is in your pocket. I kind of need to find a way to make sure it’s going to flow into our pocket. And that’s where the challenge lies. So you do that and do you ever get pushback on it?

Mike Wharton: There is often pushback once it reaches the commercial team, but if the instructions come from the FD to come up with something which makes the project work and takes away that supply chain risk because it’s not just our risk, it’s our supply chain as well. Even to the people that supply the sandwiches at lunchtime, etcetera, you know, they’re at risk as well in that situation. So once it gets to co commercial, it then goes to our commercial team as well. And it’s a case of this is what we would like to do. And then there’s always a discussion and potentially a negotiation over that. Again, we’ll have a red line that we won’t cross, particularly if someone’s had a very serious downgrade. But our market intelligence is generally pretty good as well. You know, we monitor things and what we also do in our business is when we’re approached by a main contractor to do a job, we’ll also look at who their client is and we’ll assess the credit risk of their client. Because ultimately, that’s where it all begins, you know, it begins at the top of the chain and it always cascades down.

Paul Heming: Definitely. I mean, it’s always going to flow down from the client, but just going back to your example with the vesting of materials on site, it sounds really sensible. The thing that jumps out to me there is, let’s exemplify, and this might be difficult to do, but you are dealing with a client, you see that they get downgraded. You put in a call to their FD, FD to FD the talk and say, we’re worried about it. We’ve got two projects that we’re currently on site with, we signed contract with you, we’re now worried about them. Can our two commercial teams talk? We want to have vested materials, seven day payment, blah-blah. Now that sounds great. However, the contracts that you are in probably don’t give you any room to actually manage that, right? Because they just wouldn’t. So it’s all about, you know, relationship, commercial leverage, contractual leverage, or you’re pricing another job. I’m not going to price that job for you. What actually happens, practically speaking, when your contracts don’t actually permit you to do that, but you are actually incredibly concerned about this project or this client now?

Mike Wharton: I’m not dodging that question, Paul, but that process does begin in the initial contract negotiation. So we won’t sign up to any project that we’re not comfortable with the contract with, okay? So that does give us certain leeway to have that discussion. If it comes about where that the risk of the project we’ve price becomes exponentially higher than at the point that we priced it. Either the price has got to go up or something else has got to change. So in the scenario that you’re talking about and where we say, well look, we want this and we want that. If the client says no, well, it can’t be a flat no. Contract aside, cause At this point, if there’s been a such a serious downgrade that we’re thinking that we might lose something here and that we’ll, we’ll be either underinsured or the worst case scenario, not insured at all, if all cover is pulled, for example. If it’s as serious as that, the contract is really neither here nor there, and I don’t mean to be glib when I say that, but if it’s that serious where a firm is potentially looking at going out of business, they’re not going to be able to enforce their side of that contract anyway. And we still want to deliver the work, and we still want to get paid. And because we’re doing fortnightly cost of completes on all our jobs, our commercial team will know to the pound and penny where our risk lies and how much value we’ve taken in that job versus where our risk lies. So in a scenario where we’ve already taken value, we’ve already been paid, it’s a yearlong project, for example, it’ll be a case of our risk looks like this, the commercial team will map it out, finance team will sit down with them and then we’ll make a call on it. There has to be something as serious as that.

Paul Heming: Yeah, no, and again, the risk focus in the business is there for all to see. I guess it brings me back to the question though, about how you are negotiating the contracts and sticking with the credit checking, credit scoring, you know, trade credit insurance. Is that then something, because it wouldn’t be written into a standard JCT, it wouldn’t be written into a standard amended contract, right? These things, so I guess, the point I’m trying to make is, do you then say at tender stage, are you very open? Look, the market is this, at the moment, what we do with all of our clients is we do credit checking and if things change with yours, so I’ll paint you an example. If you went from credit score of 60 down to 20 or whatever it would be, right? That would be to us a red flag. And that would be something where we would want to have an open and pragmatic discussion with you as a business. And you paraphrase that, put that in your tender qualification, and then try and get that tender qualification into the contract. So that, going back to your vested materials example, you can actually have a meaningful conversation as a project team that is founded in something as opposed to just FD to FD saying, come on, try and sort something out. Do you see what I mean?

Mike Wharton: I do. And I suppose that situation’s far more prevalent with a smaller client where if we do an initial risk assessment on them, a risk checking assessment, and it comes back poor or sort of me in the median and we apply for trade credit insurance and it comes back as zero, then again FD to FD will say, look, we’re trying to work with you on this project. It’s a million pounds or whatever, but I’m afraid we can’t get trade credit insurance on you. You know, so the first question will be, you know, why is that, what’s going on at your end? And if the answer is, well we’ve had this reduction in margin, our turnover, our revenues down, our margins, etcetera, they will then say, right, RFD rather, we’ll say, okay, well we need to see some management accounts in that case. Now, if it’s a small firm and they’re not used to that sort of thing, particularly if it’s a small main contractor, they can get very fractious about a request like that and they’ll say, oh, we’re not showing you that, it’s confidential. And our finance team will say, well guys, unless we can see something about what you’re doing and the security of where you are, you know, I’m not sure how we go forward with this. In the scenario that you mentioned where we’re in a contract, just to come back to that point specifically, it is quite difficult to build a trade credit insurance element into it because then you –

Paul Heming: Yeah, that’s what I meant. Yeah.

Mike Wharton: You go down to all sorts of rabbit holes about if this happens under what circumstance, how much downgrade, you know, what it would be. But again, you know, yes, we’re beholden in a contract, that client is also beholden to deliver certain things to us. One of those things being money. So if we think we’re not going to get paid, we have to assess that situation and react accordingly, contract or not. So my answer, I’m afraid, is still the same. There isn’t really a way within a contract to really cement that if you like.

Paul Heming: I think you’ve actually answered my question, right, because I was kind of saying from, and again, my background is similar to yours in terms of that cladding roofing, both watertight, it’s on the critical path. It’s a tough package to be delivering, right? So I understand it and I was just trying to put myself in those positions and I’ve vested materials before and it would be great to have that conversation, but the reality being that it might be difficult to push that through at a project level, but I think what you are actually saying is, yeah, I get all of those things, but the fact that we are doing all of these checks, the fact that we’ve got this insurance in place, and if we are worried we’re not going to get paid, we are going to be absolutely serious with the company as opposed to just feeding. Like, it’d be nice to have the conversation, but I can’t take it anywhere. You are going to really push it and say, we’re worried we’re not going to get paid. You should be worried we do not want to finish this job. And how are we both going to get to a point where we do exactly what you want, what we want, which is we get paid, you finish the job. And that is a mindset and a process internally, which I think many specialists don’t necessarily have or doesn’t necessarily come naturally to them because you think that contract says that, but you are still saying, that’s not how we work. It’s how can I make it so that this project is executed for us both and goes well, right?

Mike Wharton: But this is the thing, you know, you look at the likes of Henry and the receivership, etcetera, liquidations, administrations, and when it comes out later that, you know, supply chain has lost a hundred million, you know, you sit there and you think, but where is your risk management? You know, Mr. Supply chain, you know, how are you losing a hundred million? The retention bit is slightly different, you know, you can’t trade credit, insure retention. So that’s just a case of having a sharp finance team. But in a situation like Henry or Buckingham or Carillion, all the rest of it, if you’ve got retention and the company goes, you know, essentially you’re going to lose it. It’s as simple as that. So the old adage of, you know, you add the retention to your price and all that kind of good stuff, you know, for us, the whole thing lives and dies on the delivery of the project. And if the client is not financially stable, then frankly we just don’t want to work with them. It is easier with an end user because an end user has by and large got the money for the project, and the flow of that money is less important to them, certainly in times of lower interest rates, it’s becoming more prevalent as interest rates tick, tickle up. But generally, you know, vesting is a much easier thing to ask for because they’ve got the money in the bank for the project, it’s main contractors where the issue lies with a very low margin that they have and a very high competition in that market, you know, easier with refurb, it’s easier in refurb, but new build, you know, and house builders is equally problematic. It’s a reason why we’re just doing less and less new build and far more refurb.

Paul Heming: Really. I mean, like you say, it’s such an incredibly difficult business to navigate those incredibly challenging projects with multiple different stakeholders on tight margins. You talked there about end users, so project clients, you are arriving onto a project almost always, where the project client is in contract with or close to being in contract with the main contractor. And we talked about your risk management process when it comes to credit checks. You’re saying you’d also credit check project client for the obvious reasons. Is there things that you see as themes almost, which you wish main contractors were kind of doing slightly differently in their approach to project clients and don’t smirk? It sounds like you’re going to, we haven’t got all day, Mike.

Mike Wharton: It was a right smile, Paul, rather than a smirk. Yeah, there are, I mean the ongoing theme is pretty straightforward really. It’s firms who end users who are looking to expand their businesses either on borrowed money or other financial instruments that need to be given back in some way, loan notes, loans, all that sort of thing. And whilst I think I know some main contractors, you know, will look very carefully at the credit side. So many don’t, and lots of smaller ones don’t. And those smaller ones are using lots of the specialist supply chain, you know, underneath them. One particular issue springs to mind where we walked away from a job last year. We were approached by a firm that’s actually a manufacturing firm that we work with. And they had a job that they were asked, they were being asked to build a series of warehouses sort of as a mini main contracture, if you like. And we said, great, you know, we get on, well, let’s have a look at it. High six figure job. Who’s the client? Oh, it’s such and such. We looked at that client, absolutely not. Absolutely not. We wouldn’t work.

Paul Heming: Why?

Mike Wharton: Because I said at the top of the conversation, Paul, we’ve got some real strong financial expertise in our business and we do look at those firms from companies house filings to, you know, press cuttings to, if it’s a larger firm, the announcements that are made to the stock market, all those things. And it doesn’t take long to conclude, actually, we shouldn’t be working for this firm no matter where they are in the supply chain, no matter how far above us or equal or below us, you know, no, we’re just not doing it. It’s just far too big a risk.

Paul Heming: You talked about borrowed money and like what are some obvious red flags for you?

Mike Wharton: So, very straightforward thing. You go into company’s house, look at a company’s filings over the last two or three years, and you’ll see that lots of firms in Covid had charges against them from things like bounce back loans and covid loans, etcetera. I mean, we took one, you know, we have one because at the time things were incredibly uncertain. We haven’t spent a single penny of it actually. It’s all going back, you know, tick month on month. The charges I’m thinking about are a charge over all the assets of the company by a bank in Lichtenstein or Gibraltar or, you know, so something where you raise your eyebrow and think, okay, a charge over all the assets, you know, this is an organization or a firm that’s being lent some money on the basis of, you know, your mind kind of thing. And firms only agree to those things, generally speaking, not always, but generally when they’re in desperate straits. So if they do that, you can come to a basic conclusion. Hold on a minute, you know, there’s something a bit funny here. And if the trade credit insurance limit on them zero, and we say, look guys, to make this project work, we need from the get-go, we need many materials, we need vesting, etcetera. Otherwise we’re simply not doing it.

Paul Heming: And then when that gets pushed back, do you think?

Mike Wharton: We walk away.

Paul Heming: Yeah, exactly. You know, I think it’s quite simple in some respects.

Mike Wharton: It’s really simple.

Paul Heming: What your belief system and what your procedure is here. Is it something that is relatively new to the business? Is it something that has been from the get go, was something that you believed in when you joined as CEO and said, this is what we are going to do moving forward. Like how did it pan out?

Mike Wharton: Yeah, it was a case of looking at the financial systems that the firm is employing at the time. And historically, there’ve been a couple of bad debts with smaller main contractors, and it was a simple case of saying, you know, we don’t want bad debt. You know, as our firm grows, you know, there are lots of people, lots of livelihoods, lots of mortgages, lots of child nursery fees, all those things, you know, and it’s our role and our duty, if you’re in the senior leadership team, to make sure that we’re protecting those livelihoods as much as we possibly can. You know, we’re not risk averse by the way, you know, when we don’t sit there ringing our hands and sort of having Dickensian conversations that we won’t kind of go out because it’s raining. You know, we will take the risk that we’ll take will be proportionate and it’s based on return, reward, risk, all those different items. And we will take a flyer on certain things if we want to. We can move. We’re very agile, you know, our shareholders, etcetera are really agile and streetwise and smart. So we can work like that. And it works incredibly well. But we’re not averse to saying no, you know, we give a good service. We’re not a transactional business. You know, construction is so transactional and, you know, one of my aims was to take us away from that transactional base to far more service related side, which is why we’re getting more end users, you know, direct end users, not via main contractors, etcetera, where we’re working direct for manufacturers and pharmaceuticals and etcetera. So, that’s definitely a strategic thrust of the business to do that. We will still work with a handful of main contractors that we like, that we trust that are stable, that have been around a long time that we can a hundred percent work with. And you had Pete Jackson on last week and we’re working really well with [inaudible] you know, after those discussions, that is now working really well. And they’re very open with us about their financial position. You know, it’s a strong business now, but they’re not scared of talking to us about it. They raise it with us. It’s great.

Paul Heming: Yeah. What has that supply chain event, that transparency done for your relationship with said, and them as a main contractor?

Mike Wharton: It’s transformed. You know, it’s not an understatement to say that. You know, I have monthly catch-ups with their commercial director now, even if we haven’t been particularly active during that month, we talk about the market, we talk about materials, we talk about what’s coming, what’s in their pipeline. We talk about any potential touch points that are coming or any friction that there has been on site, for example, personalities, which happens no matter how smart you are or how good you are. And critically, the estimating teams are a lot closer as well. So our estimators chat to me ahead of a catch up, the seven estimators talk to those guys, and then we compare notes and we talk about things. And if we’ve got a gripe, we’ll table the gripe and if they’ve got a gripe, they’ll be just really candid. So it means that we’re understanding the way each other works. And as every month goes by, that understanding becomes deeper and deeper. There are some clients social housing wise that don’t have budgets, for example, don’t have big budgets for certain things. So we’re trying to help in making those things work, you know, helping design-wise, all those things will help the relationship and ultimately help our bottom line and theirs.

Paul Heming: Yeah. But it’s interesting, isn’t it? You know, I was explaining this to a new starter in our business who is relatively new to our industry, and I was explaining the impact that conversation Peter Jackson had, you know, like that mindset that change in his psyche, which helped to deliver bringing supply chain into it. And this one of my colleagues was saying, why is that so dramatic? Like why that doesn’t seem like that much of a shift to actually just invite your supply chain in for conversation. And I’m saying that as an industry, it isn’t necessarily what we do, is it, or what we have done, you know, quite often there are those walls built up because the contracts are fractious, the margins aren’t what they could be. And something as simple as, you know, creating that environment where conversation can and relationship can flourish, actually changes the entire dynamic, both short, medium, and long term of two businesses, right?

Mike Wharton: Yeah, it absolutely does. And at that event, you know, Pete was very candid and the results, as he said in last week’s podcast, they have been quite mixed actually. Certain trades have been quite cynical about it. Why? I honestly can’t answer that, but we’ve embraced it. You know, Pete took the podcast that you and I had episode 113 and he sent that to his estimators and his commercial team and said, guys, please listen to this. This is where we need to be. That was music to my ears. And as a result, you know, we had a big discussion with our estimated –

Paul Heming: Music to my ears as well, actually, Mike.

Mike Wharton: Yeah, I’m sure. Cause the more we prove that this actually works, you know, hopefully the more firms that do it, because as you said earlier on, this is actually really simple. It’s just a case of sharing information. You know, we are experts at what we do. They are experts at what they do, but we’re not experts in what each other does. So we can help them, they help us. The more transparent they make things, the easier it is to deliver for their clients. And if they go to their clients saying, we’re on board with these guys, they’re assisting in our design elements where we’re trying to meet your budget. There’ll be all the secure elements in place. There’s an in insurance back guarantee that the roofing contracts are providing. They’re doing this, they’re doing that. Their clients like it, and their clients are far more likely to choose them to do the job. It’s self-fulfilling. This is the thing that so many particular tier ones just don’t seem to understand. It’s all confrontational, you know, a lot of confrontation and conflict, and it just doesn’t need to be that way. You can still have a very difficult conversation with somebody, you know, if you are professional, calm, and listening, you know, all starts with listening to what the other party wants, needs, has to deliver. And hopefully that party shares those with you. For far too long, there’s been this position taking where they are not transparent with you and you cannot be transparent with them. So you’re doing this sort of dance, you know, around ultimately, which frankly is just ridiculous, you know, 2020.

Paul Heming: And as much as I would love to see you dancing.

Mike Wharton: You really wouldn’t.

Paul Heming: Honestly, it really pleases me to hear that the podcast, you know, the reason why we do this podcast, why I care about this podcast is, what did I say, episode 148, right? And some people come on the show multiple times, but say, I’ve spoken to a hundred people, every single one of those 100 people cares about the industry getting better, cares deeply about their organization and the industry generally. And I think for so many we want to see this change. And to actually see episodes having an impact, and then these relationships being formed is exactly what I would’ve wanted when we kind of set out doing this. And I think on that positive note, the simplicity of what we’ve talked about today, not actually in terms of like that process and procedure that you have got in place in terms of this is how we credit check and X, Y, and Z, I think people will listen to that and really take it away. But on top of that, I really hope that there’s people listening to this who are thinking, you know what, just hearing CEO, a large subcontractor like you talking, MD a large main contractor, Peter, and what that slightly different approach to a relationship has actually done for the two organizations. I’m sure anybody listening to this will be thinking, wow, I’m going to change the way that I’m doing. So thank you again for coming on the show. Thank you for reaching out to me and saying you wanted to chat because I knew it would be a good conversation. But, it’s been great to talk.

Mike Wharton: My pleasure. Yeah, I really enjoyed it, Paul.

Paul Heming: Excellent. I will speak to you soon, Mike. And I will speak to everybody else next week. Have a good week ahead and I will catch up with you soon.