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Carillion – What the…?

How does it feel to treat me like you do?
When you’ve laid your hands upon me and told me who you are
I thought I was mistaken, I thought I heard your words
Tell me how do I feel
Tell me now, how do I feel

How has it come to this? The UK’s second largest major construction firm has collapsed into liquidation with debts of £1.2bn. BILLION. How does a major firm with huge amounts of work and government contracts – really, important government contracts, mange to run it business so badly that it owes that much? Carillion’s debts are more or less the same as Grafton’s entire earnings for last year. Did nobody see this coming? Well, yes, plenty did and were either powerless to do anything about it, in too deep to do anything about it or wilfully ignoring it.

I haven’t been following this as closely as some of my press colleagues in the wider construction media because most of BMJ’s readers have little business with the huge construction companies like this. Some do, however, as do many of the material suppliers. In any case, a fall from grace like this will have huge repercussions across the whole sector. As indeed was the case when housing maintenance firm Connaught went down in September 2010, taking shed loads of merchant money with it. Take the big landscaping contractor on the radio today, for example. Owed £800,000 by Carillion, money that was due to have been paid this week, he’s already having to let staff go. How many of his suppliers’ bill is he going to be able to pay with a hole that size in his cash-flow?

For too long government departments contracting out services to the private sector have done so under the austerity regime, with the impetus being on getting the job done at the lowest possible cost. Equally, for too long, those tendering for Government contract work have done so by putting in ridiculously low quotes, crossing their fingers that they can make up the slack somewhere else – probably by trying to screw down suppliers on price or payment terms. Or both. It’s another example of the short-term-thinking that we seem to be doing so well in this country at the moment.

At the moment, the public sector work is continuing because it has to and the Government is stepping in so that the Receiver can continue pay those working for Carillion on public sector jobs. Those working on Carillion’s private sector contracts though, may have seen the last of their money.

We won’t be seeing another too-big-to-fail bail-out like we did 10 years ago with the banks. Rightly so, as well. If a commercial organisation aims to make money from working on Government contracts then it has to do so on the understanding that it has to take the rough with the smooth. Yes, it can take the profits and the revenue but it also has to shoulder the risks and the blame if its decisions turn out to be the wrong ones. It looks like some of those decisions were very wrong indeed. Yet the former chief executive of Carillion, Richard Howson, who stood down as Carillion issued a profit warning is apparently still being paid his £660,000 salary and £28,000 benefits until October. This is the company that Construction News reported had changed its rules to stop any bonuses paid to its executives from being clawed back by investors should the need arise. It has also been reported that the controversial Early Payment System for suppliers (pay us a fee and we’l pay you the money we owe you in less than the four months we could take) had already ground to a halt, with Carillion quibbling over and refusing to sign off on the invoices.

The Government hasn’t exactly been spotless throughout this either. Carillion also bought into an energy company in 2011 on the bac of Government promises about investment in that sector, only for the austerity axe to fall on the green energy agenda, leaving a big hole in Carillion’s finances. It was also lent money by the Government in order to fund its expansion into overseas contracts, many of which turned out no to be anything like as profitable as they should have been,

As someone on Twitter (can’t remember who now) pointed out, in an industry in which the biggest and best margins are often only 2%, Carillion’s was a collapse just waiting to happen.

This might have gone down on Blue Monday, but it’s not going to get any brighter in days to come for anyone who was depending on Carillion for work, wages or bills paid.

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About Fiona Russell-Horne

Fiona Russell-Horne
Group Managing Editor across the BMJ portfolio.

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