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Carillion exploited councils – will they now get wise?

Noble Francis

Carillion entered liquidation on 15 January and since then 2,352 of its former employees have lost their jobs – 12 per cent of the workforce. Yet the full impact of its demise is still to play out.

Subcontractors and suppliers continue to be affected and this will remain the story over the next 12 months at least. The smallest firms in the supply chain were always likely to be hardest hit initially, yet there have already been cases of larger subcontractors going bust such as Vaughan Engineering in March

We are only in June, but we’ve already seen two reports published on Carillion’s demise: the BEIS / work and pensions committees’ probe in May made headlines regarding the board’s “recklessness, hubris and greed”.

Then in June, the National Audit Office’s (NAO) report focused on the government’s handling of the collapse. It captured the media’s attention by suggesting Whitehall was surprised at Carillion’s financial problems, and that it should have rung the alarm bell earlier after Carillion’s writedowns in July 2017, adding that the collapse will cost the taxpayer £148m. 

Gulf in margins

I’m not going to go into everything that went wrong at Carillion, as it would take a whole book. Such a tome would also have to cover government procurement, flawed main contractor business models, gaming the system, highly optimistic accounting, entering new markets the company didn’t understand, and other aspects of its treatment of the supply chain. 

However, an interesting issue highlighted in the NAO report that did not get much media coverage was that of margins on public sector projects. 

The margin on Carillion’s public facilities management projects in 2017 was only 1 per cent for central government, but 13-15 per cent for local authority projects – a staggering difference.

“Central government would be happy at the low cost but should also be wondering what industry behaviour such low margins could lead to”

This suggests that Carillion consistently bid at low or negative margins to win large government contracts, but tried to offset this by bidding for council projects at double-digit margins. This is somewhat ironic given that councils are financially constrained after enduring seven years of austerity.

Interesting questions

However, this likely reflects the fact that councils now have so little resource, experience and knowledge available to procure, that they end up paying more for construction than central government. It also raises the interesting question of whether other main contractors are doing the same thing.

If so, central government would be happy at the low cost but should also be wondering what industry behaviour such low margins could lead to.

If I was a local authority – especially now, given the pressure to cut costs even more – I’d be looking at how much I’m paying for construction projects.

Noble Francis is economics director at the Construction Products Association

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