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Carillion boss 'bemused' by risk-reward ratio in construction

Carillion’s interim chief executive has told Construction News he is “bemused” by the risk and reward ratio for construction firms as he seeks to turn the troubled firm around.

Speaking to CN following Carillion’s half-year update today, Keith Cochrane said fixed-term contracts were a particular risk as “inevitably you’re making assumptions”.

Acknowledging the low margins the industry operates at, he said: “As somebody relatively new, in terms of being a chief executive of a construction business, I’m quite bemused by the risks that a company is expected to take for the reward they can earn. The relationship is out of kilter.”

On fixed-term contracts, he added: “If you’re not able to flex the price to accommodate the risks then we all know what happens: you lose money.”

Mr Cochrane, who is a former finance chief at Stagecoach and ScottishPower, was speaking after the business unveiled a £1.15bn half-year loss, an extra £200m of writedowns and cut its full-year revenue forecasts.

As part of plans to tackle its issues, Carillion will cut £10bn from its project pipeline and take a more focused approach to winning work.

“We are going to say ‘no’ to things and recognise where our skills are,” Mr Cochrane said.

“It’s about bidding with the right margins and the right assumptions.”

Carillion is aiming for a medium-term margin of 2-3 per cent in its building division and 3-4 per cent on infrastructure jobs.

In its support services for central government, it is eyeing a margin of 5-6 per cent.

Rumours had surfaced that the government had been taking an interest in Carillion’s position due to the size of the firm and its key public sector contracts.

Mr Cochrane admitted it has been in contact with civil servants.

“We have had a number of very constructive dialogues with the Cabinet Office – not at ministerial level, more with facilities,” he said.

Carillion also said today it expects the turnaround to take between three to five years.

Mr Cochrane said he hoped to cut £75m of costs within two years, but part of the process involved overhauling the culture at the beleaguered firm. 

“It’s about changing the way the business thinks; that’s a hearts and minds job and takes a bit longer,” he said. 

On the hunt for a new chief executive after the departure of Richard Howson, Mr Cochrane said the process had begun as soon as July’s profit warning was announced. 

But he revealed he had committed to staying up until next July until a permanent replacement is found. 

Shares in Carillion are currently trading down around 16 per cent at 53.5p.

Readers' comments (3)

  • Sounds very much like a bean counters view of the world. Assuming that when you make an assumption in pricing a project you will inevitably lose money. Why?
    Making incorrect and reckless assumptions loses you money.

    Understanding risk, reckless decisions, layers of management that act like a civil service, arrogance and ignorance of their own realities and not having an integrated steady supply chain is what has let Carillion down.

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  • It all sounds so very different to when they were smugly lording it over a beleaguered Balfour Beatty Group a few years ago.

    It looks pretty clear that they are a bigger basket case than Balfours ever were......

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  • Apparently "unexpected" losses of this scale, when read alongside the "unexpected" losses of every other tier 1 UK contractor ( Skanska, BAM, LOR, Balfour, Costain, Kier, Interserve, Vinci, Bouygues) in the last 2 years, must lead to some inevitable conclusions that worry industry:

    1. The UK tier 1 contractors currently provide an unstable uninvestable business proposition. Shareholders are exposed to unexpected risks and losses of unacceptable proportions out of all keeping with their possible returns,

    2. This genre of major contractor demonstrably cannot control either project risks or business risks to any degree of acceptable bandwidth for an intelligent investor. The unreliability of the former (project risks) is the source of the latter (business risk). This means the business cannot add value for customers because their model is all about integration and risk controls - which are clearly absent ipso facto,

    3. Either the degree of transparency inside their management accounts and their business controls is so poor that losses are completely unexpected - or the reporting at corporate level is a wittingly falsified and wildly over optimistic account of what has actually occurred and what the forecast loss at project level will be. Or both combined.

    4. Auditing that cannot spot £1bn of over stated and mis reported profit in a 2% EBIT industry is no kind of auditing at all.

    If post Grenfell the industry is also shown to have failed to identify and control technical risks and life safety then we have a sufficiently toxic mix to warrant wholesale change in the structure of this industry, and rid it of its opaque commercial transparency and adversarial behaviours.

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