Size isn't everything

M&E contractor RTT Group went into administrative receivership on 17 March. The sad demise of the 32-year-old firm is a salutary lesson about the dangers of doing business with the wrong type of main contractor in a drive to increase turnover.

I last visited the Surrey hq of RTT Group in 2001 to talk to boss Trevor Koch. It was an exciting time. Israeli contracting group Electra took a 62% in RTT in July 2001 and the Israelis had ambitious expansion plans.

"We were doing around £23 million turnover at the time Electra came in," recalls Koch. "They wanted us to be a £100 million business within five years." The plan was to back-up organic growth with a series of acquisitions that would see the formation of a national contracting business.

Rapid expansion

"By December 2004 we had a turnover of £54 million. But all of this had been achieved by organic growth. The promised acquisitions didn't happen," explains Koch. Such a rapid growth of turnover inevitably led to cash flow problems and saw RTT getting into bed with the wrong people. "We had about £2.5 million of bad debts from Ballast Wiltshire, Sunley Turiff, F C Shepherd and Spectrum - that was a big one, they owed us £1.2 million."

Electra was initially supportive and put money back into the company, but a change of structure in Israel saw it float its property development arm and lose interest in the small margin business in the UK. Koch bought RTT back from Electra in December 2005. It was a generous deal. The Israelis cancelled loans totalling £3 million and gave RTT a lump sum to help them on their way. "We could see light at the end of the tunnel," says Koch.

The plan was to settle all debts by September 2006. "We were trading carefully, downsizing, not chasing the big £15-20 million contracts that Electra had wanted us to do. We were going to concentrate on work that we knew how to do, up to £5-6 million in value and could control nicely," says Koch.

RTT came unstuck working with a main contractor on a PFI hospital scheme. The firm cannot be named as legal action is pending. RTT was to receive the biggest part of its fees on completion. With just ten days to go and the commissioning almost finished, a negative valuation was issued by the main contractor.

"We issued an immediate seven-day notice of withdrawal of labour and a notice of adjudication on that application. During that seven days' notice they determined the contract owing us nearly £1 million," claims Koch.

As good as Electra were to us, they didn’t understand the UK market – why profitability isn’t as high as it is in Israel, why contracts work the way they do. In Israel it’s all done by handshakes.

Trevor Koch

RTT was once again left with tremendous cash flow difficulties. Its bank was approached to extend credit while the legal action was followed but the bank refused and froze the account. "It allowed us to continue trading on a money coming in, money going out, pro forma basis while we came up with a rescue plan."

Trevor Koch and his colleagues worked with the bank's receivers Price Waterhouse Coopers to purchase the assets of the old company in the hope of novating ongoing projects. "That was our risk. I have invested a substantial sum of money to do this," says Koch. "Part of the deal is that we will continue to collect all the final accounts and retentions on the projects that are not novated, at our cost."

Some 300 jobs were saved as a result of the rescue plan. Staff have been transferred under TUPE regulations. RTT Group subsidiary RTT Maintenance and Special Projects could not be saved and 17 jobs there have been lost. The Mechelec Engineering Services arm was bought by a management team of David Wilkinson and Andrew Lawrence, saving all jobs in the process. The new company, Mechelec Building Services, is now trading out of Dover.

"We were very lucky to reach agreement with the receivers in such a short period of time. By so doing, we have mitigated the losses to most of our supply chain. Not all of it, there are hits out there and I'm very sorry about that," says Koch.

TSSR Holdings

RTT briefly reformed as RTT Services Group but has since renamed as TSSR Holdings, with subsidiary TSSR Contracts. Two other divisions have been formed but are currently dormant - TSSR Residential and TSSR Airports. There are now three directors: Trevor Koch, long-standing RTT employee Steve Hodgkiss and former Crown House and Balfour Kilpatrick man Bob King. TSSR will concentrate on developing close relationships with main contractors and end-user clients. BMS controls company Stats Environmental was purchased from the receiver and is part of the new group.

With other overseas concerns looking at the UK market, the RTT story provides a stark warning. "As good as Electra were to us, they didn't understand the UK market - why profitability isn't as high as it is in Israel, why contracts work the way they do. In Israel it's all done by handshakes," says Koch. Sadly handshakes don't count for a lot in the adversarial UK market.