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I spoke with a property developer director last week about the aftermath of Carillion’s collapse and the impact on its projects.
The developer had deals worth slightly less than £100m on site with the failed firm when it went bust.
That the UK’s second-largest contractor had entered liquidation, rather than administration, was a surprise for the developer. It is likely to lead to delays for its scheme of six weeks, with work having stopped. It expects that “business as usual” will swiftly return in the weeks ahead.
The most interesting thing about our chat though was a throwaway line: that this company had been contacted by “several contractors” within hours of Carillion’s announcement at 7am last Monday.
Rival firms were seemingly queuing up to take on Carillion’s contracts.
Companies over-extending themselves and tendering at low margins on risky projects should now be a real cause for concern.
Carillion’s rivals will be asked to step into the failed firm’s shoes many times over the coming weeks. Clients will often have to pay a premium as companies, rightly, charge extra to take on partially completed work.
But the desire among Carillion’s peers and smaller, regional players to hoover up work that was often bid at unsustainable prices in the first place should be treated with caution.
Those companies hitting the phones early on Monday last week to try to take on schemes they know little if anything about should surely be avoided.
And what of the companies trying to get back on an even keel after years of, let’s say, over-exuberance?
Balfour Beatty is already splitting the tab with Galliford Try on the Aberdeen bypass and will be expected to fulfil other Carillion deals. This is the company, in its chief executive’s words, that will finally get back to “being a contractor” in 2018 after years of difficulties.
Interserve will be tapped up for services jobs, but does it have the balance sheet to take on Carillion jobs?
What about Kier? One of the more aggressive M&A spenders of recent years, buying up everything from McNicholas to Mouchel, it is now stepping up for HS2 and Highways England jobs alone worth billions.
It has been interesting to be interviewed by national media over the past week, none of whom could comprehend the low-margin, high-risk work being carried out by contractors like Carillion.
Are its management to blame? Yes, certainly in part. Are politicians to blame? Yes, they have been blind to bad behaviour in this industry and contributed to low-margins being ‘normal’.
But if contractors go rushing in to hoover up revenue from Carillion’s downfall, it could put paid to more big players and their staff and supply chains. And these contractors would have no one to blame but themselves.
Re: Hungry Contractors and Hoovers
I appreciate that the article is aiming to make a point through a word of caution, but I have to say I think that it over states the downside and does not give enough respect to the vast majority of contractors who do know how to run their business. We work with plenty of them.
Carillion going bust IS an opportunity for other contractors – you never know precisely what you are taking on until you ‘hit the phones’ and engage. I can’t see why doing so is considered a significant risk. Contractors are keen to expand their business and here is an opportunity for both new projects and new clients and to take on what is undoubtedly a good workforce and sub-contractors all of whom have all been very badly let down.
Of course there will be negotiation of existing contracts (I would be very surprised if anyone took on existing commitments without detailed assessment – indeed, I expect clients will demand that themselves – do they really want to risk coming back here?).
There will be plenty of QS hours spent working out precisely where the contracts are up to and working out what needs to be completed. In many cases, this will reduce the overall risk as an assessment half way through is going to be much more accurate than when the project was a name and a green field site.
Also, I cannot believe that the companies that formed JVs with Carillion were unaware of the risks – especially those who formed JVs lately such as for HS2. Joint and Several liability means just that – are you suggesting that was not fully considered?
Carillion has turned out to be a huge bad apple that could probably have been avoided (or minimised) if there had been better government over sight.
Passing risk to the supply chain needs more (not less) management if anything, because ultimately the risk cannot be completely given away. What is required is a more open system of risk assessment both at the beginning of the project and during the life cycle. Giving away the risk and then putting your head in the sand is clearly not a viable strategy.
We are a Tier 3 sub-contractor who de-registered from the Carillion supply chain when they changed their terms to 120 days. I guess we were fortunate that we could do that and we did.
And it is here we come to the real risk for the government and the UK plc – the likelihood that hundreds if not thousands of Tier 2 and Tier 3 suppliers will not survive the losses that they incur through these contracts. If that isn’t a reason for better oversight and a genuine review / consideration of legislation and how it can be introduced / improved to protect smaller organisations I don’t know what is.