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After Carillion: building solid foundations

Exactly a month before Carillion, the UK’s second-largest construction firm, collapsed into liquidation, the firm held a “topping-out” ceremony to celebrate a new building in Birmingham reaching its full height.

Despite turbulent trading conditions and previous profit warnings, few would have realised that the firm itself was about to hit its own ceiling in quite such a spectacular fashion.

The coming weeks will show Carillion’s name was attached to far more than the hoardings around its many construction sites.

Already there are reports of redundancies at a horticultural firm that provided plants to its developments, and of fire services poised to deliver school meals previously provided by Carillion’s services arm. Construction News, the well-known industry magazine, has warned that “the pain is only just beginning”.

Given the sheer range of its activities, smaller contractors and construction firms may conclude Carillion’s collapse is a unique case of mismanagement. However, in truth the company’s recent troubles contain lessons that need to be learned by the entire sector.

Winning work was not a problem for Carillion – less than six months ago it was part of a consortium that won £1.4 billion of contracts for Britain’s high-profile HS2 rail project. However, if the projects were big, the margins were small – the £5.2 billion it turned over in 2016 created a profit of only £129 million. When the music stopped the firm was said to have assets of only £144 million, against debts of £1.5 billion.

Such is the precarious nature of contracting in the UK – where huge project costs and robust delay penalties can bring sudden pressures on even the most careful of contractors. Among the factors that brought Carillion to its knees were a cold winter on a project in Aberdeen, and high winds preventing the use of cranes on the construction of a hospital in Liverpool. Up to 30,000 companies could now take a financial hit as a result of the firm’s collapse.

But if smaller firms are equally unable to forecast the weather, they would do well to see what way the wind is blowing in the construction industry as whole. Those subcontractors left out of pocket in the coming weeks may ruefully reflect that the main thrust of the recent legislation brought in to regulate their industry was to prevent exactly the kind of situation in which they now find themselves.

From 2011, provisions in the Local Democracy, Economic Development and Construction Act 2009 modified the long-standing 1996 Construction Act in a bid to keep cash moving down the supply chain from the industry’s big beasts to smaller subcontractors. Previous contracts that allowed a contractor to hold-off on paying a subcontractor until a certificate of completion had been issued in respect of works were effectively outlawed. Other changes sought to make suspending work on a project a more attractive option for unpaid subcontractors.

A ‘construction supply chain payment charter’ launched by the government in 2016 as part of its “ambition for 2025” sought to make payment terms of 30 days standard across the industry. As Carillion’s creditors know, that is still far from the case – the contractor’s practice of agreeing payment terms of up to 120 days with subcontractors was one of the acts that first made hedge funds smell blood as far back as 2013.

Carillion is also widely reported to have tendered for key contracts at rates so low as to be ultimately unsustainable – again a failing they were far from alone in.

In truth, for all the exciting technological advances in recent years – from the multi-dimensional computer representations of building information modelling (BIM) to the automation of key on-site tasks – construction continues to be an industry that runs on trust. If firms continue to tender for work at artificially low rates, or withhold payment from their subcontractors for long periods there will continue to be real life consequences – occasionally as dramatic as the collapse of the biggest names in the industry. Attempts to legislate away the problem have proved unsuccessful, so it seems up to the industry itself to have a radical rethink.

Speaking in 2013, Richard Bailey - then-managing director of Carillion’s rival Bam Construction - said: “We want [our subcontractors] to be here in one, two or five years’ time. It is not responsible or ethical to have 120-day payment terms. I wonder what [those contractors paying on extended terms] would feel like if clients were imposing that upon them.”

In its final days, Carillion would come to know that desperation all too well. Now the contractors and subcontractors it leaves behind would do well to take up the title of its final annual report: “Making tomorrow a better place”.

If you have any questions get in touch with Mark Summers


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