Cut-throat competition for government contracts and lax controls over public-works tendering could lead to more Carillon-style collapses this year, experts have warned.
Construction and insolvency industry figures say the problems that beset the outsourcing giant, whose implosion last month threatens more than 20,000 jobs in the UK, are unlikely to be fixed soon, hampered by a government bogged down in Brexit talks.
Shock Announcement
“This is not one isolated account of negligence – this is indicative of a broken system whereby corporations consistently do not have the right checks and are still able to handle private and public contracts despite being in deep financial problems,” said Aidan Bell, director of London-based construction firm EnviroBuild.
Carillion, one of the largest contractors hired by the UK government, went into liquidation last month owing £1.5 billion to 30,000 small businesses and leaving a £600 million hole to its employee pension plan.
Its collapse puts in doubt the fate of hundreds of major public projects, including construction the HS2 high-speed rail link and the maintenance of key military facilities, NHS hospitals, schools and prisons.
The shock announcement has angered observers who said the danger signs were apparent months ago. A profit warning in July was followed by a decline in its stock price. And although an audit by KMPG found little of concern — an error for which it’s being probed — one of Carillion’s biggest investors, Kiltearn Partners, had already begun planning to sue the company over losses.
Analysts say the company’s demise can be partly blamed on a tendering process that encourages contractors to build razor-thin margins into bids for government work. At a time when ministries were squeezing every penny from the contracts they awarded, Carillion was submitting bids that were difficult to meet without increasing its debtload.
“It happens a lot in the construction industry – companies will tender at a price where there’s no profit, just looking to get the work and then they try to make it profitable once they start,” said Rick Smith, a director at Grimsby-based insolvency and rescue company Forbes Burton.
Realistic Bids For Public Works
Industry figures have called on the government to accept realistic bids for public works that afford contractors a certain level of profit. Bell has also called for “work in progress” reports on contracts to be reformed after the oversight system used in the UK was found to be easily manipulated and likely to lead to contractor losses.
There are also calls to reform the practice of payment retentions to ensure contracts are finished satisfactorily. It’s been blamed for snarling cashflow to smaller companies.
The construction industry is now looking fearfully at which major contractor will be next. Capita, another huge outsourcer, lost half its share value when it announced a profit warning after the Carillion collapse and concerns have been circling Serco for some time.
“If one goes then the ripples will be widespread,” warned Smith. “I would expect that other companies will be feeling the pinch.”
Due Diligence
Smaller contractors are likely to go under after assuming a company as big as Carillion would be a reliable payer. Smith said he’d been approached more than a year by a client company that had gone under because Carillion owed it tens of thousands of pounds.
“Don’t just rely on a big company’s reputation for reassurance,” cautioned Angus Dent, CEO at business credit company ArchOver, who stresses that private companies and tendering authorities need to carry out due diligence.
“Just like Carillion didn’t have to accept tough contracts, SMEs should not accept contracts where there’s a risk that they won’t be paid or where there aren’t measures in place to protect them against losses,” Dent said.
Brexit Delays & Effects
Ministers have been accused of putting public services at risk by relying too heavily on ailing outsourcers such as Carillion. Smith speculates that officials knew of the company’s woes more than a year ago but handed it ever more contracts in hopes the increased revenue stream would help pull it from trouble.
But hopes of remedying government contracting procedures may be a long way off. Little is expected to change before the UK has dealt with the repercussions of leaving the European Union, a process many fear will extend beyond the March 2019 separation date.
“The government has got its hands full with Brexit and that’s really over-stretching it,” said Smith. “This is a huge thing we’re embarking on. I don’t believe the government has the resources or time to make changes in the construction industry in the way they’d like to or what I think they would need to do to prevent this happening again.”