Where will it end? The shock collapse of Carillion last month is already causing widespread pain among the company’s staff and its embattled suppliers, but the likelihood is the consequences will extend far beyond that: retentions opponents are demanding an end to late payment practices once and for all, the private sector’s ability to manage risk on big public sector contracts is under fire, and the government is promising it will investigate the actions of the board of directors.
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CM spoke to a range of leading industry figures about the potential fall-out from Carillion’s liquidation, which once again presents an unfavourable image of construction in the court of public opinion.
“The challenges of Brexit and the Grenfell disaster were more than enough for construction, but Carillion’s demise reminds us that never mind how difficult the current circumstances, there will always be something else around the corner,” says Peter Caplehorn, deputy chief executive and policy director of the Construction Products Association.
Phil Wade, operations director at developer First Base, describes it as “a disaster which will have consequences for the industry for some time to come”.
Like many, he is heavily critical of the contractor’s payment policy. “It was pretty well known in the industry that Carillion’s payment terms for its subcontractors were extremely onerous,” says Wade. “We would not use them as a contractor as we felt their terms verged on the unethical. It seemed to us that while subcontractors suffered, the corporate part of the business did everything they could to push up margins to appease shareholders.
“For sub-contractors owed between three to four months of payments, the future looks very bleak. A lot of people are going to lose their jobs and in the current market, this could lead to some long term unemployment and loss of skilled labour from the industry. Other contractors just don’t have the pipeline to mop up additional subcontractor relationships.
“The continual drive for lowest price, at whatever cost, has undoubtedly contributed to Carillion’s collapse.”
Ann Bentley, global director and chairman, Rider Levett Bucknall
“We have to ask why the government felt it appropriate to award contracts to a main contractor who treats its subcontractors so badly.”
Richard Saxon, a former partner with BDP and now independent consultant, says “the inequitable and dysfunctional relationship between main and specialist sub-contractors” is the issue which stands out from Carillion’s collapse.
“A generation ago, main contractors held most of their trade capacity in house; now they often add less than 10% of the value on site,” he says. “Professionals, specialists and product suppliers do the bulk of the work but have no standing with the client and are exposed financially to the risk of contractor default.
“We need to change the business model so that the supply chain pulls together, with the client’s interest at heart. Integrated project delivery must be the way forward, with all suppliers recognised as stakeholders.”
Campaigners for better safeguarding of subcontractor payments may now feel their time has come.
“In the medium to longer term, changes to protect the supply chain would be welcome, and many have mentioned project bank accounts which fit with the digital agenda as well,” says Caplehorn.
Ann Bentley, global director and chairman of Rider Levett Bucknall, notes that project bank accounts have been mandated by the Scottish Parliament and Northern Ireland Executive on centrally-procured projects over a certain value, with the Welsh Assembly planning to follow suit in 2018, while in England the guidelines are to use them on public sector contracts unless there are ‘compelling reasons’ not to.
“If, as I suspect, many of Carillion’s public sector contracts did not use project bank accounts, then what what were the ‘compelling reasons’ not to?” she asks. “In the light of Carillion’s collapse are they now being instituted on all public sector contracts?”
Bentley believes that the “The continual drive for lowest price – at whatever cost – has undoubtedly contributed to Carillion’s collapse”.
She says: “To my mind, a significant part of the procurement process should be about ‘fit’; can the client and contractor form a positive relationship, does the contractor have the competence and capacity to carry out the work, is the price for the work realistic, and where does risk sit?
Unsustainable margins
“The typical margins of almost all of the major UK contractors are less than 2%. Everyone in the industry has known that this was unsustainable for years; sadly Carillion has just proved this.
