This article is an interesting read “2 years after Carillion collapse - effect on construction” the section on ‘carillion in numbers’ is shocking, i.e. it is estimated that it owed +1bn in retention to subcontractors.

1. Carillion two years on - how has
construction changed since the
collapse?
Nearly two years on from the shock liquidation of Carillion, what has the
construction industry learned?
It was one of the UK’s biggest corporate failures. Carillion’s collapse on 15 January
2018, under a £1.5bn pile of debt, sent shockwaves through the industry.
In the wake of the firm’s liquidation, two Commons select committees – the
Business, Enterprise and Industrial Strategy (BEIS) Committee and the Work and

2. Pensions Committee – joined forces to investigate what went wrong, hauling
ministers, former Carillion directors, and accountants up for public interrogation.
MPs lay into Carillion directors
‘Recklessness, hubris and greed’
Chairman ‘lacked even a tenuous grip on reality’
Carillion accounts ‘hoodwinked the government’
MPs want pensions regulator to go after bosses’ £17m
pay packets

3. Paul Morrell: Carillion’s ‘insane’ business model
But what has construction – and government – learned since the momentous
events of January 2018?
Paul Morrell, former chief government construction adviser said: “For
government, I would say the main lesson to be learned is how to manage
relationships with major suppliers.
“Carillion will be a rich source of case studies for years to come, on matters from
the mis-pricing of capital, through to some of the more primitive aspects of the
insolvency process (with the bones picked clean by “advisers”). There are signs
that some of the more fundamental issues such as auditing are being addressed,
but too often such inquiries are reduced to looking for someone to blame, rather
than addressing the structural reasons for bad outcomes.”

4. Carillion’s notorious payment terms have been under close scrutiny, and Morrell
reveals he discussed this issue with former CEO Richard Howson shortly after his
appointment.
The Cabinet Office promised in 2018 to bar contractors who fail to demonstrate
prompt payment to their suppliers from public work by autumn 2019.
Ann Bentley, global director of Rider Levett Bucknall who sits on the Construction
Leadership Council board, says: “Build UK has recently published a ​payment terms
table for its (mainly contractor) members. There are certainly a number of
contractors who pay very quickly. But there is substantial feedback from the tier 2
and 3 contractors that they are still effectively funding the construction sector.”
Phil Wade, director at developer First Base, adds: “I am not sure attitudes are
changing. We continue to see instances of other contractors being exposed for
poor payment terms (for example, Kier), so maybe Carillion has just raised
awareness. Those who have always behaved well don’t get so recognised, which is
a shame.”
In his capacity as a client, however, Wade won’t tolerate poor payment practices.
“I wouldn’t employ anyone with poor payment terms to the trades. Why would
we? We pay on time and we expected everyone else to do the same to make sure
we have motivated and well-rewarded teams,” he says.
Clients like Wade may be the exception rather than the rule though, believes
Mark Beard, chairman of Beard and vice president of the CIOB. “Customers are
taking more interest in the relationship contractors have with their supply chain,
but very few customers have a full understanding of the dynamics of contracting
and subcontracting and their comments tend to be superficial,” he says.
Carillion in numbers...
Carillion was working on 420 public sector contracts
when it went bust
The firm’s public sector revenue in 2016 totalled
£1.72bn

5.
It lost £234m on problem jobs such as prisons,
hospitals and the Aberdeen road
Carillion underbid to make a £15m annual loss on a
prisons contract
After its £845m July 2017 profit warning, the LGA told
councils to prepare for Carillion’s collapse
7 days after the profit warning it won two big HS2
contracts, using these to convince suppliers to stick
with it
The firm requested a £223m government bailout days
before it went bust
There was only £29m left in the bank when it collapsed
The liabilities of Carillion’s 27 UK-based construction
companies are estimated at £6.9bn

6.
It is estimated that its construction arm owes
subcontractors up to £1bn in retentions
How the story broke 15th January 2018
Carillion goes bust
Company in compulsory liquidation Carillion has gone under ending more than
100 years of history, leaving thousands of jobs at risk and a host of subcontractors
facing the prospect of not being paid.
The move came after discussions over the weekend between the firm, its lenders
and the government failed to reach a deal to save the company. In a statement to
the Stock Exchange this morning, the firm said: “Those discussions have not been
successful and the board of Carillion has therefore concluded that it had no choice
but to take steps to enter into compulsory liquidation with immediate effect. “An

7. application was made to the High Court for a compulsory liquidation of Carillion
before opening of business today and an order has been granted to appoint the
Official Receiver as the liquidator of Carillion.”
Business model reappraisals
Beard points to some of the shrewder contractors reappraising their business
models in the wake of Carillion’s demise.
“I believe the more informed contractors realised a little while ago that doing less
and increasingly offloading the risk was going to make them less relevant and limit
the margin they could make for their role in the project,” he says.
“I believe this realisation has led to a small number of contractors taking on more
risk in return for slightly higher margins. However, most contractors are still
trying to pass as much risk down the supply chain as possible and this is one of the
reasons they are struggling to command margins of much greater than 1%.”
The Midland Met hospital site in Sandwell, seen derelict last summer after Carillion’s
demise
Meanwhile, Peter Caplehorn, deputy chief executive, Construction Products
Association, sees the need for more stability in the construction market if business
models are ever really going to change significantly.

8. “The main contractor business model is primarily based upon merely winning
projects and managing them,” he argues. “It uses subcontracting of activity, fixed
costs and risk to deal with volatility in demand in the industry. If demand were
more stable in the long-term then it would be able to justify investing in the ability
to do the projects themselves but until then it is highly unlikely.”
Richard Saxon, consultant and former chairman of BDP, has noticed a shift since
Carillion’s demise. “I do see more clients and contractors interested in
construction management for complex projects, and in longer-term supplier
relationships since Carillion’s collapse,” he comments.
One procurement development since Carillion’s demise has been the
abandonment of PFI and its successor PF2. However, another form of private
financing may yet re-emerge.
Locked gates and no activity at Carillion’s development site at Milburngate, Durham, a
couple years ago
“PFI was considered ‘not value for money’ by government and replaced by PF2,
which contractors had little interest in anyway due to a lack of a sustained rate of
return,” says Caplehorn. “Carillion’s major issues on the two PFI hospitals [the
Midland Metropolitan and the Royal Liverpool] didn’t help PFI but the reality is
that it had become toxic, infamous for lack of value and quality.”

9. But he adds: “Government austerity means that private finance for construction
will be used in the future under a different name again.”
Bentley is of a similar view. “There is no doubt that there will have to be public
sector funding in most major infrastructure and social infrastructure projects
going forward so I don’t think PFI has gone away, it will be reborn as something
else,” she asserts. “What may have gone away are 25-year soft FM and service
delivery contracts. The government now appears to be much happier with taking
these in house again.”
If one thing is for certain, it is that the day on 15 January 2018 when Carillion
called in the liquidators will continue to provide the industry with lessons well into
the future.