Carillion – The real story

Richard Catt delivers his post-mortem on the demise of Carillion

TO say Carillion’s insolvency sent shockwaves across the construction industry would be an understatement. No, that throwaway expression doesn’t begin to explain the awful mess so many will be clearing up for years to come: the damaging impact on otherwise solvent and well-run businesses and the devastating effect it’ll continue to have on many individuals’ lives.

Yes, it would be an understatement for those reasons, but there’s so much comment in the media from many different angles that my concern is that focus will, or could, be drawn away from the bigger picture.

For me there’s a bigger story: not that government continued to provide contracts to a massively failing business, or that the directors were taking enormous bonuses right up until the end. Nor that the former ceo was still being paid a huge salary as the company folded. Or even that the auditors gave the business a clean bill of health almost up until the end.

As unpalatable as those things are, and quite rightly draw comment and outrage, those still aren’t the most important elements I personally want to push to the front of the queue and ensure aren’t lost on anyone.

Fortunately, I’m not alone in wanting to express these concerns and one of the people I’ve heard quote the message that I think is most important of all, is Mark Farmer, ceo of Cast Consultancy and author of the government-backed report Modernise or Die published in 2016. In January 19 issue of Construction News he says:

There’s a bigger issue around how tier one contractors operate at the moment. It’s a model that uses other people’s money to deliver outcomes they’re less and less in control of; it’s doomed to failure. Carillion has demonstrated poor supply chain management, adversarial relationships with the supply chain and examples where they’ve taken on risk they can’t manage.

My interpretation of some key areas that need addressing is as follows:
Main contractors are regularly pricing work at, or below, break-even. They then use money from their supply chain as cash flow, capital and to create a profit by enforcing unreasonable payment terms, unfairly challenging payment applications and demanding discounts after a price has been agreed.
Then of course they withhold retention, often never paying, even when a quality job is satisfactorily completed.
Very little of the above will be new to CFA members or readers of CFJ BUT we must ensure these main facts (that led to the demise of Carillion and which, as Mark Farmer points out, could very easily lead to others) must not be lost on government.
The CFA is working with all the leading trade bodies and lobbying organisations to call for:

  1. 30-day payment: non-negotiable.
  2. Ring fenced retention: only available to main contractors in the event of defects,
        insolvency or to return to the specialist at the appropriate time for successfully
        completed work. Ultimately leading to a ban on retention altogether once we
        have clients’ confidence that they’re no longer required, and they stop demanding
        them from main contractors.
  3. Address the main contractors’ break even, or below cost, pricing model.

In a capitalist system with a free market economy, where enterprise is protected by anti-competition laws, it may not be easy. But Carillion and all the others who operate this business model have proved it’s broken and needs review.

Going forward, construction cannot and shouldn’t be driven by price alone. If we only addressed payment and retention, in some senses it would be a dramatic improvement.

But equally, I’m slightly concerned if we don’t also push for a wider debate over how contracts are formed and priced, we may leave the door flapping wide open for the next Ponzi scheme and version of how the supply chain is abused.

Main contractors point towards clients as the drivers for many of these issues and I guess it depends on which end the telescope you view things from as to where you see the problems lie.
Carillion’s liquidation has forced everyone to face some unpalatable truths and means the whole industry realises there needs to be change.

The challenge will be to harness that groundswell and channel it into actual legislated reform. With clients, main contractors and to some extent specialist, all playing their part.
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Richard Catt is ceo of the CFA