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Business: The Carillion effect

shutterstock 1153541152 carillion

A year on from the dramatic collapse of Carillion, GE takes a look at the impact it had on the ground engineering sector and reviews industry changes in the wake of the event.

The construction sector hit the headlines for all the wrong reasons on 15 January 2018 when industry giant Carillion went into administration placing the business full in the media spotlight. The days and weeks following the dramatic downfall brought ever more revelations about poor business practice and clarity on the scale of the financial issues at Carillion.

The direct impact of the collapse varied from Van Elle revealing that it took on £1M of exceptional bad debt into last year’s accounts through to other major ground engineering contractors stating that they had little exposure.

Fears that the impact could have been much worse in the immediate aftermath were soon relieved as clients agreed to take on project costs and new main contractors were quickly found to allow work on site to continue. However, it has not all been a bed of roses as Aarsleff group estimating manager Matthew Rastall explains: “We had one live project with Carillion however as it was a joint venture the project kept running and a new partner joined the remaining party. The new partner is now trying to change rates as previously agreed with Carillion.”

Cementation Skanska managing director Jonathan Morris adds: “I think it has highlighted the need to be careful and made all of us aware that ‘big’ is not the same as ‘strong’ when it comes to clients. I think all subcontractors will be more vigilant but some ground engineering companies will unfortunately have suffered significant losses which will have been difficult to accommodate during what has been a challenging period in the market.”

One major contractor, who asked to remain anonymous, told GE that following the collapse there was a notable hiatus in enquiries for procurement of new projects and contracts resulting from an obvious loss of confidence in the sector.

Hindsight is a wonderful thing but what could have Carillion done differently though to avoid the effects of the last 12 months?

One ground engineering contractor told GE that Carillion should have pursued a different strategy and been more honest with itself about how the jobs where actually performing. “With large companies it’s very important to report secured income, as the amount of unsecured income can build up quickly and disable the figures,” he says.

Morris says: “When insolvencies or collapses happen, suppliers always suffer. If Carillion’s reporting had been more accurate at an earlier stage then it might have been possible to stop the rot.”

Another business leader agreed with the reporting issues and told GE: “The ultimate demise of Carillion resulted from very poor corporate governance – almost a disregard as it transpired during the governments inquiry into the collapse – within the group.

“From a market perspective, although it was common knowledge that the group was in financial difficulties, the continual award of contracts by government et el, lulled the markets into a false sense of security.

“From a supply chain perspective, no business should be procuring work and pressuring subcontractors to deliver under threat of reputational damage knowing they cannot or do not intend to pay them.”

The collapse has resulted in the supply chain placing greater scrutiny both up and down the supply chain. Many ground engineering businesses have told GE that they already carried out due diligence of clients and customer but the headlines of the last year have ensure that they don’t become complacent and led to more selective tendering too.

Nonetheless, there are still issues around payment terms, the focus on price and the need for earlier engagement to avoid issues developing later.

Morris says: “In some sectors the primary focus continues to be on price but there are some larger and more complex projects coming through where customers will wisely adopt a more rounded assessment including capability and quality.

“Payment practices are slowly improving and we are proud of our own position near the top of the prompt payer table.”

Another major contractor told GE: We have not seen any significant changes other than the impact immediately after Carillion’s collapse. Payments in many cases are still delayed as much as possible and require constant chasing.”

Another industry leader told GE that they have seen some clients try to change payment terms or methods in the last month but added that some have requested additional fees for early payment.

Rastall also urged clients to place orders earlier to allow real and fair engagement of specialists. “This would allow open discussion and real value engineering to add benefit to all parties,” he says.

These ideas were echoed by another major player who GE spoke to: “Building close client relationships is the best way of improving procurement processes so clients and the tier one contractors then engage with preferred suppliers in a collaborative approach to delivering projects.”

While the impact of Carillion will take time to fade, concerns over other major players has hit the headlines in recent months with the financial woes of both Kier and Interserve being revealed. But whether these businesses are at risk or have a long term prosperous future ahead of them and are now being placed under greater scrutiny in the wake of Carillion remains to be seen.

Wider impact

As well as bringing changes to the ground engineering industry and the wider construction sector, the collapse of Carillion has also had an impact on the way accountancy firms operate.

In December the Competition and Markets Authority (CMA) urged accountancy firms to separate audit services from consultancy services and called for greater competition in the market.

The CMA undertook the review in the wake of the Carillion collapse after government investigations into the causes and the drivers of the company’s downfall.

Carillion was audited by KPMG, which is described as one of the Big Four that also includes Deloitte, Ernst and Young and Price Waterhouse Cooper.

According to the CMA, current audit quality is falling short because companies choose their own auditors and, as a result, there is too much evidence of them picking those with whom they have the best “cultural fit” or “chemistry” rather than those who offer the toughest scrutiny.

The CMA also said that the audit services of the Big Four are diluted because 75% of their revenue comes from consultancy services.

“Addressing the deep-seated problems in the audit market is now long overdue. Most people will never read an auditor’s opinion on a company’s accounts,” says CMA chairman Andrew Tyrie. “But tens of millions of people depend on robust and high-quality audits. If a company’s books aren’t properly examined, people’s jobs, pensions or savings can be at risk.”

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