Construction Giant Carillion Goes Bust, Big Issues Ahead For Customers

We’re a little surprised to wake up to the sad news this morning that construction and services giant Carillion has gone into liquidation. Last night we would have put money on some solution being found to enable the financially struggling firm to continue in some manner. But this now throws up major problems and issues for several different stakeholder groups.

The jobs of 43,000 employees are now in jeopardy, although we suspect the majority of the firm’s work will continue in some manner, as "the official receiver", supported by PWC, looks to sell off the assets of the firm. Most, but certainly not all of the employees will probably be OK. There is also the issue of the company pension fund, which is some £600 million in deficit – indeed, that is one factor that worked against the prospects for re-financing the firm.

Then of course there will be difficult consequences for customers, the largest of which if we aggregate spend is almost certainly the UK public sector. Contracts range from the relatively small-scale, for instance around schools’ maintenance, to huge and strategically vital activities such as work as a prime contractor to the HS2 rail programme, and key infrastructure contracts for the Ministry of Defence.

That led to many calls for the UK government to “do something” once the scale of Carillion’s problems became clear, with pressure for the public sector to “bring contracts back in house”. Discussions at senior government levels continued over the weekend, apparently. But these are not simple decisions for ministers and civil servants to make by any means.

PWC is duty bound to consider those government contracts an asset of the business and maximise return on behalf of the creditors. Now if a contract includes robust change of control clauses, then the buying organisation might have the right to walk away and take back the work in-house or give it to another supplier.  But imagine the people issues, including but not limited to TUPE transfers into the public sector, which we assume would be legally necessary if the work does come back.

The government has already indicated that it will continue to support those contracts, so we suspect the most likely path is that other firms will take over the operation of many of the contracts. But if some are fundamentally unprofitable, it is possible that no-one will want to take them on, so then buyers would have to agree new terms or take on the work themselves.

For private sector clients, many will be examining their contracts to see what “change of control” clauses might be in place. Clients may have the right to terminate, although again that isn’t always easy for important work.

One option that obviously wasn’t taken was for the government to “bail out” Carillion in some way – prepayments on major contracts, perhaps? But think of the risks here – both the possibility that Carillion would still have failed, leaving the government exposed to claims of wasting taxpayer money, and the precedent it would set for future struggling suppliers. We do remember one case a few years ago (it never got into the public domain) when we believe an important outsourced services supplier was helped by the government – but it was a smaller business and the whole event was out of the public eye, which helped!

Suppliers to Carillion who are owed money for completed work will also be very concerned this morning. Whether they get all the money owing to them will depend we believe on how much money can be raised by the liquidation, and also the priority that they will hold amongst the various creditors. Not a happy situation, especially for the many smaller suppliers.

We will be back tomorrow with more thoughts on this whole sad affair. But once again, it shows that no firm and no supplier is “too big to fail”, and throws the spotlight once again on the need for everyone to focus on effective contract management, supplier management, and supply chain risk management.

 

 

First Voice

  1. Little Acorn:

    It is a terrible turn of events and while some of the contracts may be brought into the public sector that can be a costly business. It is likely that the brought-in personnel may not be on the same ‘level’ of contract terms (pay rates, pensions sickness/leave entitlement etc). If people are brought in, then does the public body end up with a 2-tier workforce which will be unacceptable? The brought-in staff would probably need to have their terms and conditions of employment improved to the public sector level – potentially then costs of this could be significant.

    Should this failure not cause us to pause and consider the risks we’re running by awarding more and more big, multiple, contracts to a small number of firms. the master supplier fails and drags the smaller supply chain firms with it. Perhaps, we nee to review the current ‘big is beautiful’ approach and take a more risk aware strategy, more smaller contracts awarded to the ‘workers’ rather than appointing a small number of high value contracts where, if a problem develops the impact is catastrophic – as we have here.

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