Carillion - sub contractors and suppliers

For the construction arm far more than the FM concerns, intelligent journos have started to pick up on the impact of the firm's collapse on other than direct employees. The real pain is likely to be felt by sub contractors and suppliers - with an impact on tens of thousands of people working for smaller firms carrying out specialist works for the fallen behemoth.

Subbies are always the last to be paid anyway, and have the longest wait for their money as main contractors will generally not pay until their own monthly claims have been passed, and even then may pay only a percentage, with their own retention in place. Main contractors who have won work by underbidding will also squeeze subbies already contracted. I know from personal experience how very close to the edge many subbies on big jobs walk.

Ideally, if the job is to be finished, the subcontractors will be novated to the new main contractor on the same terms - but even this takes time, and when it is likely that Carillion haven't paid them for three months (and they may end up with nothing) the prospect of waiting another three for a payment from a new principal contractor will force many to the wall. 

Clients will only find main contractors to replace Carillion on cost-plus terms if continuity is to be maintained; there is simply no time to cost and negotiate new contracts. And rescue firms will know they must secure rock solid fee agreements now, up front; clients happy to agree crash costs at times of crisis will always backtrack once the hiatus of the rescue is over; getting it sewn up tight whilst you have the advantage is the only way. 

And make no mistake, it's the clients that will pay. As long as the crash costs now are equal to or less than costs of demobilising the schemes, mothballing, re-tendering and re-mobilising, with all the substantial costs of delayed delivery, they will pay. And that means us - taxpayers - in many cases. There really is no alternative. The least-cost options will still cost us a fortune.

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.