Carillion shows that we need to engineer a new business model

Nelson Ogunshakin
14 March 2018

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Carillion collapse

Out of Carillion’s crisis comes a real opportunity to reform construction business practices, writes Nelson Ogunshakin.

Part of the reason Carillion’s collapse continues to be of interest to the public is that, unlike most other companies, it touched the lives of millions. Its fall raises questions on key areas of public life - from the trains we commute on, to the hospitals we get better in, via the schools our children are taught in.

Its liquidation also reveals several vital issues for our industry. Carillion is the latest, and to date largest, consequence of a failing model that is unquestionably in need of reform. In order to avoid repeating the mistakes of the past, we will need to have honest, open and sometimes difficult conversations on issues such as procurement, supply chains, profit margins and value for money. We will need to see the emergence of enlightened and informed clients, looking beyond the short-termism of the immediate balance sheet. 

As an industry we will need to be candid about what we need to not just survive the next six months, but to compete in the longer term in a global marketplace. To quote current ACE chair, Mathew Riley in the last issue of Infrastructure Intelligence: “It’s time to be bold and challenge conventional thinking.”

Procurement practices have been pushed into the spotlight. Carillion was, on paper at least, the perfect partner. Their allegedly large balance sheets, strong management and lengthy experience meant they were ideal to shoulder the burden of risk. What clients didn’t necessarily understand or explore was the fact that they had squeezed their already tight figures to gain new contracts.

Some suggest Carillion worked with margins as low as 2% on some projects – leaving them at huge risk of project and payment delays or penalties on one of their numerous public sector contracts. Neither did clients understand that many of Carillion’s investments over the years had failed to deliver any synergies.

The next stage in this conversation must be around profit. We need to create an understanding that profit isn’t a dirty word, nor should it be haggled down to unrealistic levels. It’s there to enable investment in people and skills and to realise the huge potential for technology, such as BIM, in reducing construction costs over the longer term. And, yes, it also creates a cushion for when things go wrong and helps build a sustainable business. A healthy partner is ultimately of benefit for clients too. 

Carillion’s collapse also highlighted the need for reform of payment practices and a fair deal for the whole supply chain. While the government champions a 30-day payment model across the supply chain, the reality is somewhat different. Figures from ACE’s 2017 Benchmarking Report reveal that the industry average is in fact 83 days. While these delays create issues for all in the supply chain, this disproportionately affects smaller sub-contractors and suppliers who have to perform financial wizardry and juggle credit lines on an almost monthly basis. 

Taken collectively these changes in approach would allow for the emergence of a more informed client. Whether public or private sector they need more knowledge and understanding of the workings of our industry. The cost of Carillion’s collapse in terms of time and money for existing projects is huge. No client worth their salt would be risking project delivery in this way if they could avoid it. We know that when the client speaks the industry will respond, but we must help them get to a place of knowledge, understanding and confidence. ACE members have a key role to play in helping to make this happen. 

Those with long memories will remember that we’ve been here before. Sir Michael Latham’s No Money and No Love in Construction from 1992, Constructing the Team in 1993, Sir John Eghan’s Rethinking Construction in 1998 and Andrew Wolstenhome’s 2008 follow-up review all highlighted the need for reform and demonstrates a lack of progress. 

We had a near-miss with Balfour Beatty in 2014, which is still in intensive care, and we are now facing the fall out of Carillion while others teeter on the brink. Now is the right time to finally face the problem and address the issues square on. Otherwise we run the risk of seeing history repeat itself all over again.

Dr Nelson Ogunshakin OBE is the chief executive of the Association for Consultancy and Engineering.