Carillion: has a race to the bottom in contract negotiations changed the engineering industry for the better?

by Heat Recruitment

Carillion, the multinational facilities management and construction organisation has been heavily featured in the news of late. The collapse of the industry giant came amidst £1.5bn in debt, and a £590m pension deficit. As one of the largest employers of Engineers in the country, combined with an industry shift towards contract or temporary based work, it is clear that the strategy of outsourcing, at least in this case, has failed. According to reports, over 800 workers have now lost their jobs after the company was put into receivership.

Professor Karel Williams of Manchester University noted that Carillion had left its roots behind – changing from a construction company into an “outsourcing conglomerate”. He continued, “With outsourcing, you have to continually bid for new contracts, and the stock market expects to see continuous growth. But sooner or later you take on a contract that makes huge losses and the operation can’t sustain those losses.”

In 2016, Carillion recorded sales of £5.2bn, with just under £600m in debt… so where did it go wrong?

The collapse has been attributed to three key areas. The 350m Midland Metropolitan Hospital in Sandwell, the £745m Aberdeen Bypass, and the £335m Royal Liverpool hospital – each of which were marred by delays and continually increasing costs. At first glance, delays that could have been absorbed by the healthy recorded sales from the year prior.

These underperforming contracts led to a reduction in their value, £845m to be precise, and a 50% increase to overall debt held. The reason the company has been forced into “compulsory liquidation” instead of administration is for one simple reason – the company had reached a point where “nothing was worth buying”. The giant reportedly overpromised in terms of contracts – ones with too low margins to justify its increasing liabilities.

James Hurley, Enterprise Editor at The Times, stated on Twitter: “Carillion not unusual in construction industry in having flawed business model, low-balling bids in order to win work then [sic] relying on squeezing sub-contractors to deliver it. A losing game for all concerned – other than Carillion’s management.” Indeed, following the issues with Carillion, the share price of Capita – another outsourcing firm – dropped by 45%.

So, the question must be asked – has the Carillion collapse acted as a cautionary tale of ‘putting all your eggs in the same basket’?

In terms of outsourcing these contracts, an endemic requirement to undercut the competition naturally reduced the funding for paying staff to actually do the work. According to Matthew Vincent at the Financial Times, “It had, in effect, become a lawful sort of Ponzi scheme – using new or expected revenues to cover more pressing demands for payment.” In saying that, some blame does indeed sit with the UK government – which remained resolute in providing the giant with new contracts to the detriment of smaller firms.

Assessing the risk of outsourcing to a far higher number of subcontractors instead of one major supplier, according to the head of corporate governance at the IoD, is one of oversight. He advised that “Ideally we would like to see more small businesses awarded these public contracts, but there is a lack of expertise and capability in the civil service to roll that out on a major scale.” Steps are, however, being taken to resolve this issue.

As part of a drive to give a third of public sector work to local SMEs by 2020, in addition to the lack of a favoured supplier, the UK government is now launching a £12bn tender for cleaning and maintenance at schools, hospitals and other public buildings – with values ranging from £500 to £1.4bn.

The Carillion collapse, then, highlights one key lesson above all else in terms of contracts… business models of this nature quite simply are not sustainable. For the industry to succeed and recover, a greater number of contracts must go direct to the specialists actually performing the work, and not a middle-man such as Carillion. Once this is being worked towards, engineers within the industry can begin to secure a much better deal.

Whilst in the short term, this issue is indeed devastating for the industry, lessons can and must be learned to return to long-term growth.

If you’re looking for your next role in Engineering or are seeking high performing staff to augment your existing operations, get in touch with our specialist team at Heat Recruitment today.

By Mike Taylor