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Monday, 15 January 2018

When construction pigeons come home to roost

Balfour Beatty must be breathing a sigh of relief this morning that Carillion's recent takeover bid was not successful. BB was lined up to follow Mowlem, McAlpine and Eaga to boost Carillion's sales and potential profits in a process that only works so long as there are more companies with which to merge or take-over; once the music stops, the whole thing generally collapses. 

Carillion was overburdened with debt and major construction contracts were simply not providing the profits to service them. This was disguised for a while by accounting for 'other receivables' i.e. money expected to be released from construction contracts, but never materialising. And this is a tale that is common throughout the construction industry. 

I once let a large contract to a subsidiary of a well known mega firm. It was a newish subsidiary run by set of very confident managers, but with no great track record. Still, their bids were excellent value and they were underwritten by their parent. Shortly after my contract started, rumours came in of heavy time over-runs on another job. They moved key contract management staff from my job to the problem job, and as a result they fell behind on my job. Their solution was to bid low for yet another job; the ever-growing order book made the risk of losses look unimportant. They failed to perform adequately on the third job, too. All the while they were reporting expected contract out turn as close to budget - even when they were into LADs for late completion. A few weeks after my job finished and the final account on their first job became clear, they submitted requests for additional payments of several millions. All the while they were still reporting to their board high levels of profitability - the cost claim was 'income' and contrived to maintain the fiction for as long as possible. 

Well, we demolished their silly claims without breaking sweat, but that took time. By the time their major losses on all three jobs became clear, the parent company decided to close down the subsidiary. The very confident managers became ex-managers. The fact is that they were able to continue forecasting profitability long after the point when it was blindingly obvious they'd cocked up hugely.

In effect, the head company shareholders subsidised my scheme by their cocky managers underbidding and hoping to make up the profits from changes, additions and variations. The form of contract I used didn't allow very much scope for that. 

Well, I'm sorry for all the good folk at Carillion including those I know and have enjoyed working with. But that's mega construction firms for you.  


Dave_G said...

...hoping to make up the profits from changes, additions and variations. The form of contract I used didn't allow very much scope for that.

Such a professional approach is sadly lacking in any .gov contract where we see cost-over runs into the millions (take the Scottish Parliament building and the Edinburgh trams as good examples with HS2 yet to come) yet, I suggest, there will be people 'within the bidding process' being rewarded handsomely by methods difficult to trace or to bring to account.

As much as we may worry for the front line workers (and their pensions) it's beyond time that the directors and shareholders were made personally responsible for any losses and/or incompetence (never mind potential criminal massaging of accounts).

I fully expect the taxpayers to, once again, take the corporate losses whilst the management walk away with all the profits.

I doubt that the collapse of Carillion was achieved without any criminal actions somewhere but I equally doubt anyone will be brought to account. The common denominator always seems to include the word 'Government' (contracts).

English Pensioner said...

One of the problems of the Civil Service, from personal experience, is that they will not take any risk that might rebound on the individual involved and thus they always tend to go to the biggest companies on the basis that "if it all goes pear shaped, we can't be blamed as we went to the biggest company in the business".
As an engineer responsible for some radar display equipment, I wanted to go to a small company whom I knew could produce some special amplifiers that we needed. Their tender was rejected by the contracts branch as they'd never had any government contracts, and it went to a major company at about five times the cost and was promptly sub-contracted to the company where I wanted to go in the first place! But, in the eyes of those with the money, it was risk free.

This seems to be the basis for most of the government contracts given to Carillion, in the eyes of the Civil Service they were risk free.

formertory said...


Not just the Civil Service. In the industry I worked in for a chunk of my working life the arse-covering was "No-one ever got fired for buying IBM". I dare say every business sector has its own version.

Anonymous said...

The "biggest company in the business" is likely to be the most corrupt and worst managed. The larger an organisation, the more difficult it is to manage.

This is the argument against both nationalisation and big-company capitalism.

In an efficient company, the boss knows the names of all the employees.

Takeovers of competitors seem to be always a bad sign.

Don Cox

Poisonedchalice said...

This is happening everywhere. I have been a business / IT contractor to small firms who deliver broadband into rural areas for nearly 7 years now. One company I was contracted to was awarded a contract to build wireless internet networks for remote villages in south Wales. The award was certainly sufficient to cover the build; but what about the on-going operating costs not covered by the award? We expected a take up of 75 homes per area; we got 25. Therefore that contract seriously damaged the company's profitability.

Now forward to a meeting I had just before Christmas with a council who now want to deploy wireless access into rural areas. I was asked a pointed question about small internet companies. "Do you think that central government has done enough due diligence on these smaller companies?" You can have the answer in one word or two. No and hell no!

Due diligence. Business plans. Best case and worst case scenarios. Monitoring accounts. Account management. Overall supervision.

Government - its all about ticking boxes.

Domo said...

Are the board experts in m&a or construction.
If m&a, what are they doing at a construction firm?
If construction, why are they trying to run serial mergers?