Recently we witnessed the collapsed in one of the largest construction companies across the UK, threatening 43,000 jobs and hundreds of subcontractors and smaller businesses. Furthermore, their portfolio which ranges from army barracks to schools, hospitals and even prisons, will lose their shareholders after being wiped out. Banks will lose their money, and the government will have to provide funding to maintain the public services carried out by Carillion’s workforce using taxpayers’ money. This is pretty much how public-private partnership (PPP) agreements work, the risk is transferred to the private sector. Although it is not the first time to happen, it has shocked the nation and there remain various things that must be considered in the lead up to the liquidation.
We ignored the warning signs.
Carillion had cash flow difficulties, but how did it all go so wrong? Support services operate in a unique way; there are lots of upfront costs involved which are settled by the government subject to being fully re-paid over a lifetime contract (20-30 years), with revenue from the customer. However, if the project spending and project delivery are not closely monitored and managed correctly, things can begin to go wrong very quickly; delays can happen, suddenly debts are racking up at a pace that is out of your control and it all becomes slightly unsalvageable. Carillion were using upfront payments for new projects to cover losses on previous projects which led to several delays, more notably Carillion’s £335m Royal Liverpool University Hospital project. Whilst focusing on being the UK’s largest contractor and effectively taking on more than they could handle, Carillion lost sight of being a sustainable and profitable business. Now they are paying the price.
Since July last year, any instructions made to Carillion were on a joint-venture basis, where the other parties will now take up the responsibility of delivering the contracts alone. This suggests the government knew the risks were on the rise and has led The Labour Party to argue that the taxpayer must not bail out the firm. Labour has called for an investigation into the Governments actions before Carillion’s closure.
Carillion had debts of over £900 million as well as a £590 million pension deficit and has now seen its shares price plunge more than 70% in the past 6 months after making a string of profit warnings and breaching its financial covenants.
Carillion will probably go down as one of the largest disasters in construction history and there is a lot that can be said and learnt from:
1. Choosing corporates will not guarantee work safety.
2. Sustainability takes forever. And that’s the point.
3. Stop planting flowers in peoples’ yards who aren’t going to water them.
4. Just make sure your intentions are not pretensions.
Working in an entrepreneurial environment at Recruitment Entrepreneur, GKR London are surrounded by several start-up recruitment companies as well as supporting many of our clients looking to take their team to the next level, whom work hard to ensure their cash flow is managed correctly and monitored closely. With cash flow difficulties being the main reason for killing one in every four SME’s, let alone defeating already established corporate giants such as Carillion, we need to get our heads around it. Cash is King.