Analysis

"Lessons to be learnt" – industry reacts to Carillion collapse

Contractors and consultants are bracing themselves for further consequences as the fallout from Carillion's collapse continues over coming weeks. There was very little surprise in the initial reaction to the UK's second largest contractor being placed into liquidation on Monday morning, given the profit warnings and Carillion's creditors refusing its rescue proposal last week. Now that the company's fate is sealed, its demise is being predicted as the start of a long process of damage limitation, then inspection of how government and industry procure and oversee major public sector contracts.

Government, the Official Receiver and adminstrator pwc all moved quickly to reassure the market that Carillion's key public sector contracts with government departments would be taken back in-house. Carillion workers involved in education, defence and other facilities management services were told to turn up to work as normal.

Key partners and clients were also keen to point out the effects would be minimal. Kier, a partner of Carillion's with French Firm Eiffage in the CEK consortium, which was awarded two of the biggest HS2 Phase One construction contracts, put out a statement saying no financial impact is expected on its joint ventures with Carillion 'after a short period of transition'. Kier also worked with Carillion in JV on Highways England's Smart Motorway programme. "We have put in place contingency plans for each of these projects and are working closely with clients so as to achieve continuity of service," the Kier statement said.

Direct consequences of the collapse for Carillion JVs have already emerged, however. Galliford Try confirmed it would share an additional £60m to £80m cost burden with Balfour Beatty on the £550m Aberdeen Western Peripheral Route project. Separately, Balfour Beatty said it faced a £45m impact from the Aberdeen project, the A14 in Cambridgeshire and the M60 Junction 8 to M62 Junction 20 scheme.

These projects represent just a fraction of industry likely to be affected after the collapse of a business that had reported turnover in excess of £5bn early last year. 

"The impact of Carillion's collapse will become clearer in the coming days, but it is increasingly apparent that employees, sub-contractors and clients could all stand to absorb significant losses as a result."
Simon Rawlinson, head of strategic research, Arcadis

“The impact of Carillion’s collapse will become clearer in the coming days, but it is increasingly apparent that employees, sub-contractors and clients could all stand to absorb significant losses as a result," said the head of strategic research at Arcadis, Simon Rawlinson. "In the immediate term a key priority for the liquidator will be to ensure that major programmes and public services continue to be delivered with minimal impact to partners, clients and end-users, as the assets of the business are disposed of. The ramifications will be felt across the industry."

There is a wider role for industry to play in keeping ongoing contracts running and minimising damage to the supply chain, Rawlinson added. Others were more disdainful towards a business that seemingly sought ever bigger order books at the expense of judicious management of cashflow and risk and ultimately around 20,000 jobs.

"There are going to be lessons to be learnt from this whole episode," said a director from another major UK contractor who asked not to be named. "With Carillion running a £1bn loss and deficit the writing's been on the wall, but this is the industry's biggest collapse in a lifetime and there are going to be heavy consequences. Other contractors have enacted internal restructuring and refocused on their core competencies and more selective bidding, but at Carillion it appears there was too much focus on chasing turnover. That's not sustainable. No-one knows how this will play out exactly, but inevitably there will be project delays and cost increases and there's going to be a lot of fallout. Many SMEs will not get paid. We need more cross-government regulation or oversight of construction industry corporate behaviour."

Regarding HS2, the same director refuted Kier's claim of minimal impact. The CEK consortium was awarded two of the largest contracts involving the majority of the Phase One tunnelling and substantial project risk, which will now be spread across just two contractors, one of which has comparatively limited resources in the UK. "That's not sustainable either. I cannot see how those contracts can continue without more resource being brought in."

Simon Rawlinson pointed to the parallels between Carillion's demise and a recognised need for better coordinated management of risk across government infrastructure programmes:

“It is too early to be able to predict the wider implications of the failure of Carillion, but with the public sector taking a greater interest in an ‘enterprise approach’ to project delivery, there will be a need for a re-allocation of resource to clients who may retain a greater exposure to programme risk.  As a result, we may see some shifts in the market as in-house teams boost their capacity and capability in readiness for taking on this additional commitment."

Ramboll's UK managing director Mathew Riley said: “We all know that Carillion is a good company with a long heritage but they are a victim of the industry’s business model, a model that doesn’t work. This should be a lesson for the public sector and how it procures because transferring risks to the private sector in an industry that operates on wafer-thin margins was an accident waiting to happen.

"Carillion is a victim of the industry's business model - a model that doesn't work. This should be a lesson for the public sector and how it procures because transferring risks to the private sector in an industry that operates on wafer-thin margins was an accident waiting to happen."
Mathew Riley, UK managing director, Ramboll

“The public sector needs to change the way it procures and have a better understanding of the risks that it is seeking to manage and the risks that it is seeking to share or transfer to the supply chain. This could be about taking on some of that risk as they may have been transferring some risk that they maybe shouldn’t have. It comes back to what risks are you seeking to manage, do we understand them well enough and are all those risks capable of being transferred which historically is what the public sector has sought to do. This episode shows that some of those risks can’t necessarily and shouldn’t be transferred to the private sector.” 

“The public sector still need the skills, knowledge and experience of the construction industry, but that’s often from a technical perspective not a business perspective and where the public sector - and behind them the government - sometimes don’t differentiate are what are business risks as opposed to project-based risks. Has that boundary been crossed where it shouldn’t have been?”