CIC - Construction Intelligence Center

Carillion's Collapse

17 Jan 2018

The collapse of the UK’s second largest construction firm, Carillion, has sent shockwaves through the industry and the UK economy in general. With emergency talks with creditors failing to find a solution to the company’s financial troubles, and with the government refusing to provide £20m that Carillion had hoped would convince banks to prop up the firm, there will be significant disruption to the construction industry in the UK. Major projects involving Carillion will potentially be put on hold and numerous service providers and sub-contractors will themselves face potential bankruptcy as they failed to get paid by Carillion.

 

Carillion has been placed into liquidation rather than placed into administration, which would have allowed it to continue to trade while a buyer is found. This suggests that there is relatively little left of value in the company, which operated in three main areas: construction; support services; and in public private partnerships (PPP), such as funding and managing the building of a new NHS hospital.

 

Carillion’s downfall can be chiefly attributed to enormous losses accrued from PPP contracts in the UK. The firm had to bear substantial losses due to sustained delays from a variety of sources, and additionally, investors were increasingly bearish on Carillion’s financial position, with delays in payments to suppliers, mounting debts, and a ballooning pension deficit. 

 

Under PPP contracts, the government awards the contract winner an upfront payment. Construction can then begin, while contractors, like Carillion, may not need to start paying sub-contractors immediately. During this time, much of the original upfront payment will typically be used to pay other debts within the business, creating a precarious situation where firms must keep winning new contracts in order to pay their bills. Additionally, the contractor is responsible for cost overruns and project delays. Working on thin margins for government contracts, such delays can cause large financial problems for contractors. Carillion was beset by such delays on a number of major PPP contracts, with losses from three projects reportedly amounting to £375mn. 

 

There have been a number of red flags; these ongoing operational difficulties combined with a £580mn pension deficit, and debts of around £900mn, prompted the company to issue several profit warnings over the last year. As the company’s financial position deteriorated, its stock value plummeted, with a number of investors shorting their positions.  

 

Before its collapse, Carillion’s financial position was becoming increasingly unsustainable; reports estimate that the firm owed money to some 30,000 sub-contractors. Suppliers complained to the Federation of Small Businesses that they were being made to wait up to 120 days to be paid, double the usual 60-day period. 

 

There will likely be a number of longer-term impacts from Carillion’s collapse. According to Timetric’s Construction Intelligence Center, Carillion was involved in over projects currently under construction with a total combined value of around GBP24 billion (US$33 billion), in addition to major strategic infrastructure developments in the early stages of development, including High Speed 2 Rail link, in which it was involved in a GBP1.4 billion joint venture.

 

The government reports that it has contingency plans to protect public services provided by Carillion, such as cleaning and catering in NHS hospitals and prison maintenance. Additionally, some of Carillion’s partners on major projects will likely take over the firm’s share of their joint-venture contracts. Nevertheless, a number of major contracts across the country will be severely disrupted, and likely face further delays and rising costs. Moreover, the company’s demise may prompt a review of PPP practices, with some calling for improved transparency and financial sustainability for contractors.