14th March 2019
Carillion: A Much-Needed Catalyst for Change?

The shock liquidation of this industry giant on 15th January 2018 will long be remembered. It was a seismic event that has had a devastating impact on thousands of employees, creditors and subcontractors across the UK.

The company relied heavily on large public service contracts which were often less profitable, and when some of these underperformed, the resulting debt burden was around £900m. The rest, as they say, is history.

Over a year on, are lessons being learned? In the past, the construction industry has been criticised as being slow to change its culture and adopt new working practices. It’s generally been accepted that projects take time, supply chains can be long and complex, and payment cycles are overly- extended.

Carillion’s collapse served to show that some of the sector’s business fundamentals were badly flawed. Whilst business principles are being revised in many quarters, challenges such as Brexit shouldn’t be allowed to take the industry’s collective eye off the ball.

Cashflow management is key

This was a major problem, and the company was reported as having only £29m left in cash on liquidation, against debts of around £1.5bn. Cashflow is important to any business, whatever its size. Carillion was using cash from newly-acquired contracts to fund its cashflow deficit on existing projects. Without careful cashflow management, any business can be on course to fail.

Tendering processes can be improved

Even after it had issued two profit warnings, Carillion was still winning government contracts. The enquiry from the Public Administration and Constitutional Affairs Committee found that the government’s overriding priority for outsourcing was spending as little money as possible, whilst forcing contractors to take unacceptable levels of financial risk. The committee concluded that the government must use the failure of Carillion as an opportunity to learn how to effectively manage its contracts and relationships with the market.

We need a culture where consultation is the norm

Supply chains within the construction industry often involve a complex system of contractors beyond the first tier of suppliers, particularly on major projects, and it can be hard to maintain quality throughout. Carillion’s collapse should serve as a warning that clients need to keep closer to their contractors, and take greater interest in project management for complex projects, in order to understand and minimise risk.

Payment terms need shortening

On its collapse Carillion owed considerable amounts of money to over 30,000 suppliers. New payment practice reporting requirements came into force last year, exposing the industry’s best and worst payers. Arguably, more action is needed to bring the industry’s poor payers into line.

Businesses need to stick to their core skills

One of the key business lessons has to be that a business should stick to what it’s best at. By the end, Carillion had moved well away from its core skills, having diversified into areas like healthcare, education and aviation, and it had spread itself too thinly. Its senior management simply weren’t in touch with the realities of business on the ground.

Be realistic about what’s in the pipeline

Carillion’s report and accounts painted a very optimistic view of its pipeline, but many commentators have doubted whether many of the projected deals represented more than outline discussions with potential clients.

Big is not always beautiful

A company’s size and reputation can give it considerable clout in the market, but that does not make it immune from trading difficulties. As in every business, it is important to be certain of those you engage with. The Federation of Small Businesses claims that Carillion used its market standing to put undue pressure on smaller firms to cover up its own financial failings, and has stressed the need to minimise the risk of large firms dominating the market.

A waiting game

The collapse of this industry giant serves as a timely reminder to all who operate in the sector of the importance of having effective risk management frameworks and business continuity planning in place. It also underlines the need for the implementation of ethical business practices and prompt payment and retention procedures. With the government currently embroiled in Brexit negotiations, it looks as if we may all have to wait a while longer for new regulations to come into force.