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EP_19.jpg Sept/Oct 2005
Cover Story
Oregon Timber
Lafarge Group

Nigel Layton shows why construction companies must protect themselves.


02.jpg In today’s world there are two key issues, which have increased in importance in business world – and the construction industry is no exception. These are the issues of protecting your company, product and staff through due diligence and security.

Some of the effects of ineffective due diligence and security to construction companies can include financial loss as a result of incorrect construction project budgets, disappearance of plant materials and over-invoicing; reputation damage - exposure by corrupt employees, and subcontractors with knowledge of a corrupt tendering process; damage to morale - a result of having corrupt employees.

Due Diligence The industry has traditionally suffered from allegations of kickbacks and fraud. The need for due diligence on prospective business partners has become increasingly important. Reputations are hard earned yet, particularly in the construction industry, they are also easily damaged and adverse publicity can be fatal in an increasingly competitive market.

This stresses the need to know your business partners. Why waste years of building a blue chip reputation by entering into a transaction without thoroughly understanding the reputations of the senior management of the target company? In the initial stages of any construction project, corruption is the most likely type of fraud to take place. At the project realisation stage, false statements in documents and records can be used to conceal other frauds and this is companies need to be aware of this and be comfortable with their working partners.

At Quest, we have recently been involved in a major takeover deal. Our client was acquiring a medium-sized competitor and it had heard industry rumours that there was a corrupt culture among the management of their target company. There were four key directors of the business and we were asked to conduct reputational due diligence on them. Our review consisted of a broad sweep of confidential sources and publicly available material.

The review revealed that three of the directors were highly regarded individuals with very good reputations for honesty, transparency and performance. They had no involvement in insolvent businesses and were not implicated in any corruption or other scandals. The remaining director had a very different history. He had been involved in several pieces of litigation. He had also been involved in several insolvent businesses and had, in the local borough press, been accused of trading insolvently and phoenixing companies (ie: having multiple insolvencies leaving creditors with large losses). The findings were raised as part of the deal negotiations and the deal only eventually proceeded, at a reduced price, once it was agreed that this director would resign from the business.

The lessons to be learned are that a relatively straightforward due diligence exercise can assist in protecting your company’s reputation.

Other key areas are the procurement stages of any major construction project. This is where corruption is most likely to occur and companies must take steps to ensure that adequate controls exist in the procurement department ensuring adequate segregation of duties. Pre-acquisition due diligence reviews should also include a review of procurement controls.

But above all the focus must be on key individuals. Corruption will show in the lifestyles of the perpetrators. They inevitably get greedy and build one swimming pool too many. It is widely known that the events of September 11, 2001 brought sharply into focus the need to be vigilant regarding site security. Terrorists are increasingly sophisticated and security professionals are urging their clients to ‘think the unthinkable’. The events of September 11 were not predicted. The only prediction I will make about the next major terrorist incident will be that it too will not be predicted. It is now not beyond the realms of possibility for terrorists to conceal devices in a building at the construction phase. This increases the need for thorough site security and vetting of security staff be they full time employees or sub-contractors.

The security manned guarding industry will be regulated from 1 January 2006 and this will bring an increased training requirement that should assist in increasing awareness and security.

Huge losses Crime prevention is often not a top priority for construction companies but it should be. The losses from theft and vandalism suffered by the construction industry have been estimated at around £400 million a year - over £1 million every day.

Construction sites are easy targets. Constant staff turnover means it is difficult to keep good security records - and the high value of plant and equipment can lead to quick and easy profit for successful thieves.

Great responsibility rests with site supervisors. If they take a strong line on site security by making company policy clear to everyone, they can go a long way towards reducing the problem of security and theft.

Security covers all of the company’s assets and sloppiness in looking after plant and machinery can adversely affect a company’s financial performance and reputation. Security personnel must be trained to deal with all security threats, not just the terrorist threat. The preparation of detailed security risk assessments covering all of the company’s assets is not only best practice but essential in today’s world.

In addition there are potential criminal sanctions against directors who fail to take proper steps to protect the safety of customers and employees. The prevalent blame culture in the UK has led to a more litigious society and corporate manslaughter cases are becoming increasingly common against directors of companies who fail to implement proper security policies and procedures. These can lead to imprisonment in the most extreme of cases. Companies must now have fully documented security policies and procedures that are adhered to and are enquiry proof.

A Group security policy and procedures should be adopted by the Board and communicated to all senior management. This covers areas such as designation of responsibility for security issues throughout the company. In the absence of such a document it is impossible to prove that robust systems are in place.

Both security and due diligence are crucial to the reputations of the company. The matters highlighted above are those that pose significant threats to hard won reputations. Security and due diligence are no longer unwanted luxuries. They are necessities in today’s hostile and litigious world.  CT-E

Nigel Layton is chief executive of Quest. For more information, visit www.quest.co.uk

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