Carillion's Collapse: What went wrong?

Unless you’ve been living under a rock for the past week, you’ve probably heard the news that Carillion, the UK’s second largest construction company has admitted defeat and gone into liquidation. It’s a story that has been given plenty of coverage and rightly so.

The impact of this collapse is set to affect many. 20,000 UK Carillion employees are now facing unemployment, with smaller third parties who are linked with the company also likely to collapse as their cash flow has now been compromised. This will lead to hundreds if not thousands of third party contractors also losing their jobs as a result. With so many feeling uncertain about the future of their careers and pensions, it’s not hard to see why Carillion’s collapse has caused such an uproar.

The million-dollar question at the moment is- what happened? While news of its financial troubles were made public last year, the liquidation has still come as a shock to many. It’s hard to believe that a company with such an impressive portfolio of contracts would suddenly face a collapse of this scale. So, why did Carillion collapse?

Too Diverse?

One argument is that the company was too diverse. Carillion was known as a giant within the construction industry, having completed work on major projects such as the Tate Modern and the new Government Communication Head Quarters (GCHQ). But construction wasn’t the only pie that it had its fingers in.

In addition to the construction contracts within the private sector, Carillion also had public-sector contracts on its books. It was responsible for the cleaning and maintenance of hundreds of schools nationwide and also provided 32,000 hot school meals on a daily basis. It was the biggest facilities manager for the NHS, covering building maintenance, meal preparation and managing the NHS helpdesks. But it doesn’t stop there.

Carillion also had contracts to maintain 50,000 properties for the Ministry of Defence and around half of the UK’s prisons. It was also the second-largest to supplier to Network rail for building and signalling projects, as well as being among the winning bidders for two vital contracts on the HS2 rail project.

When you realise just how many varying contracts the company had on it books, it makes it more apparent that it won’t just be Carillion employees and sub-contractors who feel the full force of this impact. The provision of several public services that we all rely on could be at risk too.

As a construction company, it seems odd for Carillion to bid for contracts that it seemingly had no expertise in thus making losses more likely. Maybe it was more about securing as many contracts as possible regardless of what they were, rather than taking the time to choose more strategic projects.

Lack of Risk Management?

This calls to question what kind of risk management Carillion was carrying out when bidding for contracts. But also, why the Government continued to put all its eggs in one basket by giving Carillion £1bn worth of additional long-term contracts even after learning of the profit warnings.

The government has a “Strategic Risk Management Policy” in place where if profit warnings are released or risk factors are uncovered, the company in question is then considered high risk. A Crown representative should then be appointed to manage the relationship between the company and the Government, and Government departments are advised to reduce where possible, any extra work.

Unfortunately, it seems that this policy may have been overlooked in Carillion’s case. After the second profit warning in September last year, a Crown representative was still yet to be assigned to the case and even more work was still being supplied. Perhaps Government hoped that giving Carillion additional contracts would help improve its financial state- but as we all now know, it did the opposite.

Cost overruns on major Government construction projects, caused by delays and technical issues had already put Carillion into serious debt, which was again due to a lack of risk management. When the company was already making a loss on several major projects, adding more contracts into the equation was perhaps not the best idea. Profits are generally estimated during the bidding process and it seems that Carillion made the mistake of being overly-ambitious time and time again. It’s no wonder that lenders felt they could no longer bail the company out.

Company Practices?

Something else that has raised a red flag during the Carillion collapse is the behaviour of its directors. Despite the money woes, it’s now become apparent that the board of directors were still getting paid handsomely, even after leaving the company. Richard Howson, Carillion’s former chief executive left the company in 2016 and received £1.5m in bonuses and pension payments. But it was also agreed that the company would still maintain his £600K salary until October 2018. The same can be said for other former bosses of the company.

It seems that the board was made up entirely of independent directors, so these added extras that previous bosses were receiving were going seemingly unnoticed. It also looks as though the Carillion board committee were either not sufficiently analysing their pension deficit figures or just hiding the truth as new reports show that the deficit was actually £2.6bn, not the initial report of £587m.

This again links back to the difficulties with risk management. Audits should have been carried out over time to understand the financial state of the company, particularly after receiving multiple profit warnings. In hindsight, if a representative of Carillion’s employees and stakeholders were invited to be part of the board, these issues with company practices could have been brought to light sooner. Whether they would have stopped the collapse altogether is anyone's guess.

The Government should have also been more hands-on in its approach and followed policies more closely. For now anyway, all bonuses for Carillion’s directors have been stopped since news of the liquidation broke and further digging into finances continues.

Now that the liquidation has happened, it’s time to start planning for the future. The Government has agreed to fund Carillion’s public service contracts- at least for the moment and encouraged employees to carry on as normal. The cost of this might be coming directly out of the tax-payers pockets but this is yet to be confirmed. The future of the private sector contractors however is far less certain.

One thing that we can all agree on is that no single thing led to the collapse of Carillion- it was an accumulation of several factors. The real victims in all of this is the contractors who have no idea when they will be paid what is owed to them. The question we should all be asking ourselves now is who will take on the public contracts that Carillion has left behind? Will they be handed to another service provider or will the Government sort it out for itself? Only time will tell.

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Stephen Wahl

22nd January

Industry Insight