黑洞社区

The staff of Hills Electrical and Mechanical discovered that the company had been sold when David Hill, their chief executive, sent them a sombre email that outlined what had befallen the company. He ended it with the dolphins鈥� farewell from Douglas Adams鈥� Hitchhikers鈥� Guide to the Galaxy: 鈥淪o long, and thanks for all the fish.鈥�

That sign-off may appear at odds with the gravity of the situation: the firm鈥檚 sale to rival Southern Electric Contracting had burdened its 200 employees with an uncertain future. But in another way it was understandable that Hill would want to use a little humour to ameliorate what was for him a personal tragedy. And the touch of the absurd well reflected the absurdity of what had taken place: a 41-year-old family company that had worked on some of the most prestigious projects in recent history, and had built up a turnover of 拢70m, had been sold for 拢1.

The email was sent on Saturday, 9 February. The immediate cause was 拢13m of PFI schools contracts in Scotland and northern England that went wrong and racked up losses of 鈥渕illions鈥�. Back in January 2007, Hill told 黑洞社区 that any takeover offer would be given 鈥渟hort shrift鈥�, but those contracts led to a financial spiral that made a sale inevitable. 鈥淲e got stung,鈥� says Hill. 鈥淭he obvious thing was to carry on trading. We could have done, but it was a better option to sell the company.鈥�

But with a host of large projects under way and a valuable reputation for top-end electrical work, the suspicion must be that there was an underlying reason that explains why the firm was wrecked by a few difficult contracts.

Disaster looms

The first thing to clear up is just what went wrong with the school work. The problem, according to Hill, was in the way the work was specified. The client had used performance specifications; this meant that rather than be told to fit, for example, a certain number of lights, the specialist had to work out the best way to achieve a certain level of lighting.

These specifications, passed down from the main contractor, may only be given to a specialist once a project鈥檚 design has been largely completed, making it tougher to meet the client鈥檚 standards. It is also the M&E specialist that must often bear the cost of last-minute alterations; this is especially tough in a sector that typically operates on wafer thin margins. 鈥淚t鈥檚 a case of everybody finding their own way,鈥� says Hill. 鈥淓verybody blames the last guy in the chain, and we鈥檙e always the last guy in the chain.鈥�

Rudi Klein, chief executive of the Specialist Engineering Contractors Group, said the news about the company came as a surprise but the cause was sadly familiar. 鈥淭hey are extremely skilled and well-respected. Something鈥檚 gone wrong somewhere and sometimes you can be one contract away from disaster,鈥� he says. 鈥淭he way PFI contracts operate is for the risk to be passed down the supply chain. I鈥檝e seen some very onerous PFI schools contracts.鈥�

Rapid expansion

Despite these onerous terms, however, many specialist contractors do manage to survive difficult contracts with tricky performance specification; and those who remember NG Bailey鈥檚 travails on the National Physical Laboratory in Teddington, west London, will know that some have taken bigger hits and survived.

Hills鈥� problems may have been exacerbated by the schools, but many believe it is the firm鈥檚 bulimic history of expansion and contraction that meant it could not take the hit and survive.

The obvious thing was to carry on trading. We could have done , but it was a better option to sell the company

Back in 2003, it made sales of almost 拢100m, and a profit of 拢400,000. Then two years later that changed to a loss of 拢848,900 on turnover of 拢70.3m. In an interview Hill gave 黑洞社区 at the beginning of 2007, he describes what went wrong: 鈥淭he wheels fell off the wagon the following year. We lost a lot of money. The company was full of entrepreneurs, everyone was pulling in different directions and the contract control wasn鈥檛 good.鈥�

After that the managing director left, and Hill put in place centralised systems to control contracts, with the separate offices consolidated into three regional hubs. That strategy appeared to work, and Hills鈥� pre-tax profit in 2006 reached 拢306,000 on a turnover of 拢70m. The company鈥檚 2007 accounts have been completed but never released; SEC鈥檚 acquisition announcement cited a turnover of 拢45m.

One industry source said the company had been looking for a buyer for the past six months. An insider said: 鈥淚t was perceived as a business that was going through difficult times.鈥�

In this way, Hills鈥� situation partly echoes that of fit-out contractor Benson, which went bust at the end of 2004 after rapid turnover growth. Although Benson was spared the pain of onerous PFI deals, it too was unable to cope when one of its divisions suffered from problem contracts.

Many of those connected with Hills believe this rapid growth caused the company鈥檚 downfall. A former employee of Hills, now a senior figure in the industry, says: 鈥淚 think it鈥檚 a shame, because [Hill鈥檚] old man built a really good company, and David grew it to a size that I think was out of control and let go the people his father had in place.鈥� He believes the loss of experienced people would have had a strong impact on the firm: 鈥淕uys like them are priceless.鈥�

The head of a rival M&E firm, who did not wish to be named, said Hills鈥� regional office business model made it 鈥渟usceptible to the market鈥�. Hills has branches in Gatwick, Cardiff, Nottingham, Walsall, Glasgow, Edinburgh and London. 鈥淭he thing with Hills is they鈥檝e got 12-13 offices spread around the UK; when you鈥檝e got offices that are relatively small, collectively they may make a big loss,鈥� the source says.

The future

It remains to be seen what will happen to the business now, but Hills says he draws some comfort from the fact that its future lies in SEC鈥檚 hands. 鈥淚t made a lot more sense to go with a trade buyer rather than a capital fund that wouldn鈥檛 have been interested in doing anything for the company,鈥� Hill says. 鈥淢y primary concern was to make sure the employees and the stakeholders got the best deal 鈥� we鈥檝e achieved that.鈥�

As for Hills personally, he plans to set up a new business 鈥� but not in the M&E sector. He says that outsourced training is the 鈥渨ay of the future鈥� and has turned his back on contracting. With little sign of payment improvement to specialists and increasingly onerous contract forms such as those described by Hill and Klein, many think other high-profile figures could follow him out of the sector 鈥� with some tempted to jump before they are pushed.

Martin Burton, contract manager at heating engineer HW Sladdens, says: 鈥淓verybody is looking for a way to get out of the industry, but that鈥檚 a dreadful note [for someone like Hill] to end their contracting life on. But generally people try to build up a company to pass on that keeps on trading to provide them with a pension, and then they think 鈥榟ow can I get out of this?鈥�. It鈥檚 too much grief for too little return, that鈥檚 the problem.鈥�

If Burton is right, David Hill won鈥檛 be the last to be left thumbing away from impending doom.