The decision to award Carillion’s HS2 JV two of its civils contracts sent the wrong signals to the supply chain over its financial future, according to a number of subcontractors.
John Axten, managing director of energy management specialist BMSI, which has lost £230,000 in Carillion revenue, told Construction News the awarding of the HS2 contracts played a major role in its decision to continue working for the contractor.
“It came at a time when supply chain saw a profit warning and I was starting to see a deterioration of terms [with Carillion],” he said.
“But after being awarded such a high-profile job, I know it’s wrong, but you do tend to think the government has the resource to do more due diligence than we do, so that must be a good thing.”
In July, weeks after the firm’s first profit warning, the joint venture comprising Carillion, Kier and French firm Eiffage was awarded two of HS2’s phase one civils contracts, worth £1.4bn.
Jon Fenton, chief executive of Van Elle, which has accrued debts of £1.6m following Carillion’s liquidation, agreed the choice of Carillion as a HS2 contractor sent a false message to the market.
He said: “The government was placing massive contracts with Carillion right up to the end on HS2, so the messaging out there was deceptive.”
Van Elle chief financial officer Paul Pearson added that the fact Carillion was working for HS2 made it even more of a shock when the firm collapsed three weeks ago.
The awarding of deals by the government came at the time when some private clients were opting against contracting Carillion for works over fears it could collapse.
Last week it was revealed Quintain decided against handing Carillion a £130m deal on its £2bn Wembley Park regeneration due to concerns over the firm’s ability to trade.
Two weeks ago, transport secretary Chris Grayling said banning Carillion from bidding for the HS2 deals would have been illegal.
HS2 has stressed that the awarding of the deals were not to Carillion but to its JV, and that the client sought assurances from Kier and Eiffage immediately after Carillion’s profit warning that the JV would be able complete the works if its partner went bust.
The collapse of Carillion has prompted significant criticism from the sector over the government’s procurement of construction contracts.
Patrick O’Keefe, managing director of groundworks specialist O’Keefe, which worked on Battersea Power Station for Carillion, told CN that while his firm was not exposed to the collapse, the government should learn lessons from what happened.
“While Carillion was happy to take on these government contracts, it was obvious that they are being awarded at margins far too low,” he said.
Full interview with Patrick O’Keefe
More from the subcontractor boss on his “massive sense of regret” over Carillion.
Mr O’Keefe said he believed Carillion was not the only major construction firm taking on government deals at unsustainable margins, and that many other contractors would face similar difficulties if this low-cost culture persisted.
He said: “Until our largest client realises that margins of 2 per cent margins and under are not sustainable, the construction industry will not move on and more failure will come.”
BMSI’s Mr Axten, whose firm has now resumed work on a handful of Carillion’s public contracts, urged the government to free up funds to pay for the wages of subcontractor’s staff for work before the liquidation.
He said: “If the government said wages for work before the liquidation would be paid on public sector contracts that would give firms certainty.
”A number of our customers will struggle in a few months time if they are unable to access that additional funding and you will start to see the ripple effect throughout the industry.”
Construction News has contacted the Cabinet Office for comment.