As well as building things, Carillion expanded into facilities management for schools, prisons and government (MoD) housing (Carillion)
A professor at Manchester University has said Carillion’s woes are caused by its decision to become an outsourcing conglomerate.
As the fate of the UK contracting and services giant hung in the balance over the weekend, many were asking how it could have failed so badly.
In July Carillion revealed an £845m black hole in its finances, blaming a number of large, loss-making contracts.
That, on top of a pension shortfall of £587m, left it facing a debt mountain of around £1.5bn.
But Professor Karel Williams at Manchester University’s Alliance Manchester Business School, said Carillion’s decision to evolve from a building contractor, primarily, into an outsourcing conglomerate was “a bad idea”.
The strategy certainly made Carillion indispensable to the UK government. It maintains 50,000 homes for the Ministry of Defence; manages nearly 900 school buildings nationwide; is the second-largest supplier of maintenance services for Network Rail; and holds £200m worth of prison contracts, according to figures compiled by the BBC.
But that’s the problem, said Williams.
“With outsourcing, you have to continually bid for new contracts, and the stock market expects to see continuous growth,” he told newspaper The Guardian on Saturday. “But sooner or later you take on a contract that makes huge losses and the operation can’t sustain those losses.
“There are problems when you move past being a specialist outsourcer. Many conglomerates just churn through contracts and move into areas they don’t understand, until their luck runs out. This was an accident waiting to happen.”
Whether or not Williams’ assessment is accurate, Carillion’s misfortunes on a few major projects will have made its underlying position even more untenable.
Last year a review of contracts by KPMG uncovered the need for the £845m “provision” for loss-making projects. Of that figure, £375m related mostly to three UK PPP projects, including the troubled £335m Royal Liverpool Hospital, while £470m was lost in the Middle East and Canada.
Overseas, Carillion has been reported to be locked in a “£200m row” over cashed owed on a major contract in Qatar linked to the 2022 FIFA World Cup.
As GCR reported in October, citing City A.M., Carillion had not been paid for nearly a year for work on a $650m (£493m) contract it won in a joint venture with a local firm on part of the $5.5bn Msheireb Downtown redevelopment of central Doha.
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Win contract awards “at all cost” mentality, leads to outcome is that is to everyone’s cost.
I hope when the smoke clears something good can come from this. The manner in which construction companies obtain their work is deeply flawed. The lowest bid wins approach puts too much risk on the contracting industry and in many cases deeply undervalues the skills and resources of good quality contractors. Every project has a ‘correct price’ which represents good value for the employer and allows the contractor to make a reasonable profit with a reasonable sharing of the risks. There has to be a method developed of establishing this price. My view is that the answer lies in some form of two-stage tendering but it will require a complete rethinking of current processes and a higher level of maturity from negotiating partners. In the meantime I feel very sorry for all of the employees whose jobs are at risk and hope they can quickly recover from this tragedy.
Is there no person within the government that thinks hold on, why are we giving so much work to one construction company, if this company hits the buffers we are in trouble as with Carillion? How is it we can we see this and the powers in high office can’t??
Professor Karel Williams at Manchester University states that Carillion’s downfall was due to its move into outsourcing and there follows a reference to losses of £335m on three UK PPP projects and £470m in the Middle East and Canada – i.e. £805m of the total £845m. I suggest this is what caused Carillion to fail, not losses on outsourcing. At a typical margin of 4% on construction project Carillion would have had to do £21 billion of profitable turnover to make up those losses…
During difficult times, contractors have no option but to procure projects at shoestring margins. However, if strict controls and adequate administration of contracts are not deployed, it is not surprising to find them going bust. Non payment by clients is also due to failures of contractors to demonstrate entitlements. We saw over the past decade a constant decrease in the attention to professional administration of contracts, and therefore it was inevitable for the industry to head towards disasters of this nature. It may be too late for Carillion to now investigate whether it administrated its contracts appropriately, but it is not too late for others with contracts of thin margins to learn a lesson therefrom, and add to the well trodden Time, Cost & Quality, an emphasis on long ignored fourth element – Contract Administration.