'CONSTRUCTION NEWS' BRIEFING::

THIS morning’s announcement that Carillion has sunk, while widely anticipated in recent weeks, still comes as a bitter shock.

That it couldn’t convince lenders or the government to step in, despite being entirely intertwined with the successful building and running of crucial social and economic infrastructure of this country, shows how sorry a state of affairs this had become. It suggests there is even more wrong with Carillion’s balance sheet than has been publicly revealed.
What is definite, though, is that the pain is only just beginning. Expect many more smaller, specialist companies to follow Carillion in going under.  Their crime?  Signing up to work for Carillion, possibly against their better instincts.
When the company extended its payment terms to 120 days in 2013, a senior manager described it to me as “an accounting trick, to retain cash”, but insisted suppliers were on board and that it was about expanding, rather than protecting Carillion.
It would continue to use its suppliers’ cash to make acquisitions, like a majority stake in Ask Real Estate in 2016, despite being burned by deals such as buying Eaga to try to take advantage of the doomed Green Deal and Feed-in Tariffs.
Consider this from the CN100: Balfour Beatty was in a similar, sorry state in recent years.  It has undergone pain, shrunk in terms of bids and managed to get back to a stable footing.
Balfour Beatty cut its directors’ remuneration from £5.61m to £2.72m in its most recently filed accounts. Carillion increased it from £2.72m to more than £3m.
Last year, Carillion’s bosses took steps to ensure bonuses were sufficiently protected.
Did its leaders know then that the balance sheet was getting out of hand? Its debt and pension liabilities had been talked about in industry circles for more than a year before its first profit warning came out.
The company extended its use of the controversial reverse factoring method for its supply chain later in 2013, due to what it described at the time as “high demand” from its supply chain, despite rivals gleefully slamming the move as unethical.
Bizarrely, the government of the day distanced itself from what Carillion was doing at the time, but took matters no further. It told CN at the time that government “does not encourage the use of supply chain finance to extend payment terms”.
That Carillion updated the market about the strength of its balance sheet, just months before the crisis unfolded, is unforgivable and has rightly led to an FCA investigation.
Today, tens of thousands of direct employees and tens of thousands employed by subcontractors are scrambling for information, for jobs and for answers.
It should not have come to this.
So what exactly did the government know?   And why has it seemingly taken years to get to the point where Carillion’s management eventually admitted defeat?
Calls for public investigations are often made these days, and generally with good reason.  This will be a watershed moment for the construction industry and a public investigation is required.  The industry needs answers.
For now though, there are many good people who will need jobs and many specialists contractors who will be fretting about survival.
It is a bleak day for this industry, which must learn from Carillion’s mistakes and show solidarity more now than ever before.

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