First Carillion. Could PurpleBricks Be Next?

First Carillion. Could PurpleBricks Be Next?

 

First Carillion.  Could PurpleBricks Be Next?

Carillion collapse sparks warnings on fixed-price contracts.

The Sunday Times article by John Collingridge outlines one of the primary reasons for the collapse of giant, Carillion.

And the fear has spread, as bosses of top construction companies warn the government they will no longer accept fixed-price PFI deals.

Balfour Beatty, Britain’s biggest construction company, has been moving away from fixed-price contracts.

Why?  The reason, they say,is that they are vulnerable.  To big losses if the projects encounter unexpected problems.

Balfour Beatty said in a report:

“We need to move away from the position where fixed-price contracts, risk transfer, lowest cost tendering and adversarial relationships are the norm”.

The very same fixed-price contract that your ‘disruptive’ PurpleBricks estate agency offers vendors.  Small fry in comparison to Carillion and Balfour Beatty.  But the principle is the same.

A vulnerability to big losses if the project encounters unexpected problems.

The big difference is that the government would insist any project completes on spec.  There is no such insistence from the homeowner, looking to sell their property.  What happens, in fact, is that the estate agency transfers all the risk to the vendor.

Yes, it’s a fixed price contract.  Yes, the services appear the same. But, when unexpected problems arise, which party bears the risk?

Not the estate agency.  That risk falls on the vendor that was foolish enough to consider a fixed-price deal.

online/hybrid

Problems with the mortgage?  Problems during the sales progression?  Problems with the offer reduced at the last-minute?

Sorry, not the problem of this estate agency.  The solution to most problems is either reduce the asking price.  Or find another buyer.

Or, where a significant amount of extra work is necessary.  Ignore the problem altogether.

After all, it’s a fixed-price.  And the likelihood is that the agency  already has the cash.  Up-front.

The majority of these disruptive online estate agencies have yet to make a profit.  We’ve talked in other posts about number of hours involved in each completed sale.  The more hours involved, the less gross profit.

PurpleBricks is burning cash like there’s no tomorrow.  Expansion into Australia and the U.S.A.

Doesn’t come cheap.

Pouring money down the drain on T.V and local radio advertising.

Carillion plunged into insolvency with £28 million left in the bank.

But with significant liabilities.  Brought on, in part, by their business model of fixed-price contracts.

Despite all the doom and gloom, this week the banks were saying that PurpleBricks could gain a significant market share by 2020.

The very same banks that understand nothing about estate agency.  The very same banks that can’t get it right on the economy.

PurpleBricks is very upbeat about the number of instructions it gains. Local Property Experts beavering away with new business.  The traditional high-street agencies appear under threat.

Except, they make no mention of the instructions that have not completed.  The disgruntled vendors left dismayed after ten months on the market.  Whose only option is to grin and bear a price reduction until they have to nigh on ‘give it away.  Or, vendors that switch back to traditional agencies and write-off the fees paid, up-front.

If there is a significant increase in the number of instructions failing to complete, the liabilities increase for the agency.  Except, that the risk still falls on the hapless vendor.

Fixed-price agency fees should be toast.  It’s only uninformed homeowners that keep this dubious practice alive.

Time will tell whether the fixed-fee agency model has any long-term credibility.

My guess is that it will go the way of Carillion.