Why Carillion Failed


Blue Monday this year really did have some truth to it, Carillion one of the largest construction companies in the UK has failed and the fallout of this failure will need some weeks if not months to determine the actual effects of what has actually happened and what will happen.

Construction and multinational facilities management giant Carillion relied heavily on large contracts in fact quite a few of these contracts were public-private partnerships (PPP’s). Public-private partnerships are long term contracts between a private party and a government entity, to provide either a public asset or service. Taking on PPP’s usually bears significant risk to the private party who are usually entirely responsible for the project, despite being in partnership with the government, the private party within a public-private partnership who is in this case Carillion is also likely to only be remunerated for the project on completion. Therefore a company such as Carillion who were struggling with short term cash flow issues, could not really afford to take on PPP’s which are high risk long term contracts. With three large public finance initiative schemes late and over budget, one scheme valued at over £700m it is no wonder why Carillion failed.

1999 saw Carillion start out as a construction company and since then it has become somewhat of an outsourcing conglomerate. When outsourcing there is a constant need to bid for contracts and at biding stage the contract and agreement may seem reasonable and achievable however with long term contracts, fluctuating markets can cause large contracts to make significant losses, unbeknown to anyone at the time that the contract was agreed. It is important therefore for house builders and construction companies to consider this when taking on large contracts and perhaps factor in contingencies at the bidding stage.

Morphing themselves into an outsourcing conglomerate was not Carillion’s only problem, they also branched into too many different industries. Carillion seemed to lack focus, one minute pulling out of construction altogether in order to focus on services and then the next going back into construction again. For any organisation, in any industry, having a clear focus is paramount and whilst development and change can be a good thing, constant indecisiveness is not and can be very destructive.

The notion of having an abundance of “main” contractors subbing out every job to smaller subcontractors who then take on agency staff to plug the gaps is simply a recipe for disaster. The number of times I have gone past sites that are either over staffed, having people who are not fit for purpose and sadly over paid. There is a massive skills shortage in the sector and the number of times I have met a “site manager or assistant site manager” of one of these main contractors to have next to no knowledge on the sector is shocking. The whole industry needs to go back to basics. Bricklayers stick to brick laying, general builders need to know when they are out of their depth, Site Managers need to know how to manage the site and have good general understanding of construction. The number of individuals you see working on the roads or large sites just standing around, smoking, drinking coffee, on their phones its shocking and is a fundamental cause as to why the construction sector has so many failures

In short Carillion’s failure was down to a number of issues, with the main ones being; poor management, the cost of taking on PPP’s and large contracts without having the initial cash flow and without factoring in contingencies as bidding stage, lack of focus and greed to expand into too many different industries. So what can other house builders and construction companies learn from this, well firstly to only bite off as much as you can chew, don’t take on PPP’s and long term large contracts if you are struggling with short term cash flow. Perhaps instead build up a few short term quick win projects before hand, to get yourself set up to able to cope with the amount of initial investment that taking on long term contracts require. Contractors need to be more regimented like being in the army, have that structure and authority. Secondly, invest in reliable subcontractors and technology so as that you minimise the likelihood of a project overrunning or going over budget. First class machinery, M2M and SMART technology is becoming more and more commonplace in many different industries and the ROI can be seen clearly, with less mistakes and room for human error. Not only can construction companies now benefit from SMART Technology and machinery, with recent developments in virtual and augmented reality companies could employ preventative measures and predict problems before they even happen.

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