Multiplex

The Australian firm Multiplex Constructions (MC) (part of the Multiplex Group) bills itself on its website as offering construction services and a 'highly successful track record of delivering large, complex projects on budget and often ahead of schedule’ If I was MC I would rewrite this part of their website description – it just looks odd given the disastrous outcome of their involvement in the Wembley Stadium project.

Wembley Stadium, the old home of English football, was demolished in 2003 and Wembley National Stadium Limited planned a new stadium. It sought tenders for the construction by first indicating a maximum amount it was prepared to pay and then renegotiating a little. MC was the only firm that actually submitted a bid. It did so for a fixed price contract of ₤445 million with a tight completion timetable. Many now believe that the reason no other firms bid was that the maximum set by WNS was too low. If this is so then MC, by successfully tendering for the project, suffered a winner’s curse.

Indeed one wonders why MC was not suspicious about the absence of other bids from established European construction firms. These competing firms might reasonably suppose, given their good local knowledge, that they could compete with MC.

Many industry commentators believe MC was keen to do the project, perhaps for an expected low return, to get their ‘foot in the door’ with a major, visible UK project – a loss-leader that would lead to greater future business there. Dreams of a triumphant entry into the UK market however have turned into a nightmare. MC’s reputation in the UK has been shattered by cost blowouts of at least ₤200 million and by late completion of the project by at least a year. It is the biggest loss on a construction job in British history.

What went wrong? Apart from apparently under-pricing the project two difficulties seem to have developed: (i) problems MC faced in dealing with subcontractors in a business environment very different from Australia and (ii) underestimating the technical complexity of the project. The latter problem became somewhat acute because Multiplex had only limited experience in building sports stadiums and nothing on the scale of Wembley. The Wembley design was technologically complex partly because of the 133 metre high arch - the centerpiece of the stadium – from which will be suspended a retractable roof.

The whole episode sounds strange. Tendering for a highly visible, though technologically complex, project in a new market where, because of a lack of a local production base, there would inevitably be extensive reliance on sub-contracting with firms that would be new to MC – relational contracts and mutual understanding were likely to be minimal

Critically, Cleveland Bridge UK was hired for ₤60 million as the project’s main steel contractor and was, among other things, charged with steel work in the arch structure. But by the second quarter of 2003 MC and CB were in dispute.

By that time CB claimed there would be ‘substantial cost increases and delays and disruptions’ to the steel works because of late and incomplete design changes. MC admitted there were cost increases and delays time but it disagreed with CB's estimates of their size and effect. In December 2003 CB told MC that the steel works face significant cost increases and a delay of 50.5 weeks. MC wrote back to CB rejecting the claim. In June 2004 the arch was erected and MC (unsuccessfully) sought damages from CB by reneging on a due payment. In August 2004 CB wrote to MC saying it would not perform any further work on the project and would remove its workforce that day. CB then instituted proceedings against MC seeking ₤20 million damages while MC in return sued CB for at least ₤30 million.

MC claimed that CB was incompetent and attempting to ‘holdup’ MC (by asking for upfront payments for work done) while CB claimed that MC had more than 800 design changes in the steel contract which meant that the work they were asked to do was unrecognizable from that for which they successfully tendered. CB stood up to Multiplex in ways that subcontractors in Australia were unlikely to do. Moreover, as it has since emerged, CB’s actions occurred only weeks before CB went bust!

CB have now left the project and been replaced by the Dutch firm Hollandia on a cost-plus contract to complete the steel work. According to the Australian Financial Review (May 20-21) (subscription required) Hollandia’s estimated costs are ₤125 million on top of the ₤60 million already paid by MC to CB. The steel contract is thus 3 times over-budget and now, to further complicate matters, disputes have now developed between Hollandia and MC.

Business students here will recognize a host of standard issues of incomplete contracting – indeed someone will hopefully write this up as a business school case study. Apart from being intrinsically interesting as drama it illustrates many important themes in modern microeconomics – bidding issues, market entry problems, outsourcing and holdup issues, corporate culture issues and bankruptcy theory for just a start. What is a misery for the shareholders of Multiplex will priovide grim pleasures for academics teaching in business school.

The final outcome of the legal actions will be determined in the courts by Justice Robert Jackson on June 5 or 6. I’ll report back.

Final Remark: Much of the information for these notes comes from Geoff Kitney & David Rogers, 'The Stadium Built for Losers', Weekend Australian Financial Review, (Subscription required) May 20-21, p22-23. Additional useful information is at the ABC Four Corners website but this whole strory deserves a book or a PhD thesis at least. IO am scounting for information on the Multiplex episode and would appreciate any good references.