Insight

How has construction changed since Carillion’s collapse?

6 January 2019 | By Neil Gerrard

Illustration: Jack Richardson

One year on from the shock liquidation of Carillion, what has the construction industry learned? Neil Gerrard spoke to senior figures from across the industry.

It was one of the UK’s biggest corporate failures. Carillion’s collapse on 15 January 2018, under a £1.5bn pile of debt, sent shockwaves through the industry.

In the wake of the firm’s liquidation, two Commons select committees – the Business, Enterprise and Industrial Strategy (BEIS) Committee and the Work and Pensions Committee – joined forces to investigate what went wrong, hauling ministers, former Carillion directors, and accountants up for public interrogation.

But what has construction – and government – learned since the momentous events of January 2018?

Paul Morrell, former chief government construction adviser, told CM: “For government, I would say the main lesson to be learned is how to manage relationships with major suppliers.

“Carillion will be a rich source of case studies for years to come, on matters from the mis-pricing of capital, through to some of the more primitive aspects of the insolvency process (with the bones picked clean by “advisers”). There are signs that some of the more fundamental issues such as auditing are being addressed, but too often such inquiries are reduced to looking for someone to blame, rather than addressing the structural reasons for bad outcomes.”

Views on Carillion lessons from the CM reader panel

Brian Impey, director, Acorn Multi Academy Trust

“The lessons being taken are more from failed strategy and process than from the cultural flaws. Money has always been used as an influencing tool and nothing has changed in construction, particularly in large organisations where people in middle management are results focused and seldom give any consideration to the impact of starving the supply chain of cash.”

John Adams, director, BIM Strategy

“Carillion collapsing has left a deep wound on the industry and we’re in a period of healing and reflection before any real action kicks in. But now we’ve had such a high-profile failure, there is a wider acknowledgement that we need to make an active start on changing.” 

Peter Egan, principal engineer, UK Engineer Taskforce

“Clients are still focused on results and many are still looking at savings over their contractors’ payment
ethics. The greatest area of change has been in the SME market, where companies are becoming more selective on their contracts.”

Carillion’s notorious payment terms have been under close scrutiny, and Morrell reveals he discussed this issue with former CEO Richard Howson shortly after his appointment (see box).

The Cabinet Office promised late last year to bar contractors who fail to demonstrate prompt payment to their suppliers from public work by autumn 2019. But will that change main contractors’ attitudes towards payment terms?

Ann Bentley, global director of Rider Levett Bucknall who sits on the Construction Leadership Council board, says: “Build UK has recently published a payment terms table for its (mainly contractor) members. There are certainly a number of contractors who pay very quickly. But there is substantial feedback from the tier 2 and 3 contractors that they are still effectively funding the construction sector.”

Phil Wade, director at developer First Base, adds: “I am not sure attitudes are changing. We continue to see instances of other contractors being exposed for poor payment terms (for example, Kier), so maybe Carillion has just raised awareness. Those who have always behaved well don’t get so recognised, which is a shame.”

In his capacity as a client, however, Wade won’t tolerate poor payment practices. “I wouldn’t employ anyone with poor payment terms to the trades. Why would we? We pay on time and we expected everyone else to do the same to make sure we have motivated and well-rewarded teams,” he says.

Clients like Wade may be the exception rather than the rule though, believes Mark Beard, chairman of Beard and vice president of the CIOB. “Customers are taking more interest in the relationship contractors have with their supply chain, but very few customers have a full understanding of the dynamics of contracting and subcontracting and their comments tend to be superficial,” he says.

Business model reappraisals

Beard points to some of the shrewder contractors reappraising their business models in the wake of Carillion’s demise.

“I believe the more informed contractors realised a little while ago that doing less and increasingly offloading the risk was going to make them less relevant and limit the margin they could make for their role in the project,” he says.

“I believe this realisation has led to a small number of contractors taking on more risk in return for slightly higher margins. However, most contractors are still trying to pass as much risk down the supply chain as possible and this is one of the reasons they are struggling to command margins of much greater than 1%.”

The Midland Met hospital site in Sandwell, seen derelict last summer after Carillion’s demise

Meanwhile, Peter Caplehorn, deputy chief executive, Construction Products Association, sees the need for more stability in the construction market if business models are ever really going to change significantly.

“The main contractor business model is primarily based upon merely winning projects and managing them,” he argues. “It uses subcontracting of activity, fixed costs and risk to deal with volatility in demand in the industry. If demand were more stable in the long-term then it would be able to justify investing in the ability to do the projects themselves but until then it is highly unlikely.”

Richard Saxon, consultant and former chairman of BDP, has noticed a shift since Carillion’s demise. “I do see more clients and contractors interested in construction management for complex projects, and in longer-term supplier relationships since Carillion’s collapse,” he comments.

One procurement development since Carillion’s demise has been the abandonment of PFI and its successor PF2, which Chancellor Philip Hammond ruled out using for future government contracts in his autumn budget. However, another form of private financing may yet re-emerge.

Locked gates and no activity at Carillion’s development site at Milburngate, Durham, a year ago

“PFI was considered ‘not value for money’ by government and replaced by PF2, which contractors had little interest in anyway due to a lack of a sustained rate of return,” says Caplehorn. “Carillion’s major issues on the two PFI hospitals [the Midland Metropolitan and the Royal Liverpool] didn’t help PFI but the reality is that it had become toxic, infamous for lack of value and quality.”

But he adds: “Government austerity means that private finance for construction will be used in the future under a different name again.”

Bentley is of a similar view. “There is no doubt that there will have to be public sector funding in most major infrastructure and social infrastructure projects going forward so I don’t think PFI has gone away, it will be reborn as something else,” she asserts. “What may have gone away are 25-year soft FM and service delivery contracts. The government now appears to be much happier with taking these in house again.”

If one thing is for certain, it is that the day on 15 January 2018 when Carillion called in the liquidators will continue to provide the industry with lessons well into the future.

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