Comment: Once again Carillion has filled reams of newspaper inches this week with the ongoing fiasco now crystallising in a compulsory liquidation writes Mark Farmer, chief executive of construction consultancy CAST.
This turn of events, less than a few days after speculation was rife that a debt for equity deal might be possible or at worst an administration, is far worse.
It suggests Carillion’s woes were worse than the speculation and that effectively nothing was considered salvageable as a going concern.
This story is not just about Carillion though, as it provides further evidence that the construction industry’s delivery model is broken and that “business as usual” is no longer feasible in a market of large scale fragmentation and sub-contracting, a turnover rather than margin culture, a growing skills and labour crisis, rising cost inflation and systemic issues surrounding deteriorating predictability of cost, time and quality outcomes for end clients.
What perhaps is most surprising about the sequence of events that led up to the announcement of liquidation is the relatively short time period between Carillion announcing a relatively healthy trading position to what was then followed in short order by three consecutive profit warnings.
For a business this big to go into this death spiral so quickly is unprecedented and despite the fact that pension fund liabilities were extensive and there were undoubtedly problem contracts, it suggests the true extent of Carillion’s construction and property management contract losses were initially being understated.
Whether this was through lack of business governance and controls, or something more sinister remains to be clarified, but in any event the result is the same – an industry heavyweight is now gone. One that held the lineage of great historic firms such as John Mowlem, Sir Robert McAlpine and Tarmac.
Carillion was clearly a highly-indebted business, with an intangible asset base and disintegrating profit margins, borrowing large amounts in the short term with an uncertain cash flow.
These issues aren’t insular in the construction industry, but Carillion’s exposure and breadth of operation means that its liquidation will now send ripples through the entire supply chain, potentially affecting tens of thousands of jobs and a gigantic portfolio of active work.
The half-completed Carillion sites will face the particularly daunting task of negotiating work with members of the supply chain in order to continue to deliver and finalise those projects.
The knock-on impact on creditors subject to Carillion’s much publicised 120-day payment terms could now leave the wider industry exposed, creating a domino effect that will ripple through every layer of the industry, from developers, to sub-contractor, to suppliers.
Although Carillion clearly had serious financial mismanagement issues, the structural problem we now need to reflect further on as an industry is the basic model of delivery – the industry standard, if you will.
The crisis shows – without doubt – that the model of divesting to sub-contractors has gone too far, where risk is disproportionally shared out and where accountability is non-existent.
The myopic focus on turnover, rather than improving margins and removing waste in the supply chain through efficiency and innovation, has resulted in the immediate collapse of an industry giant.
It should serve as a seminal moment and a catalyst for change – but will it?
Once again, the construction industry finds itself in the limelight for the wrong reasons.
Although Carillion clearly had serious financial mismanagement issues, the structural problem we now need to reflect further on as an industry is the basic model of delivery – the industry standard, if you will
It will not exactly act as a recruitment call to the talented youngsters we desperately need in our industry, at a time when a retiring workforce is starting to bite. We must use this an opportunity for self-reflection and, ultimately, modernisation.
The government’s decision not to bail out Carillion is the right one as a precedent must be set for the entire industry: if you fail to modernise, to change the way you physically deliver and manage built assets, you cannot expect the taxpayer to come to your assistance.
This will act as a stark – but necessary – reminder to other tier one contractors that “business as usual” is not a viable option anymore. Change isn’t easily accomplished, but a dose of ‘tough love’ is needed.
When huge, industry-leading companies are crumbling under the pressures created from the standard delivery model, the sector must understand the severity of the situation we find ourselves in.
Bizarrely, the procurement and delivery practices that Carillion’s clients and advisors will now be forced to adopt under duress to get their projects completed are likely to be a lot closer to what the industry should be adopting as standard.
These will include direct procurement at tier two specialist level, management and package procurement, incentivised delivery based on more integrated discussions and a better understanding of delivery risk.
None of these possible solutions involve tier one contractors handling other businesses’ money as a contractual intermediary and trying to control things that are effectively no longer in their control.
It is now time for a change that will challenge many of the traditional roles of both contractors and consultants that should be completely focused on who can control and manage risk and who adds value to the process, not how big their turnover is.
The story of Carillion’s downfall will echo around the entire industry for some time to come, shaking the standard delivery method to its very core.
But out of the rubble, a new, modern and robust construction industry should emerge: one where joined-up thinking takes precedence over adversarial behaviours and pricing, and where the quality and longevity of the built asset – the home, the office or the school – is the priority of the entire industry.
Without changing, we will continue into inexorable decline.
