The collapse of global construction business Carillion has grave and far-reaching implications for the broader engineering sector. Industry leaders are calling for root-and-branch reforms to the manner in which businesses like Carillion operate.
This comes amid well-founded concerns that businesses in Carillion’s extensive supply chain could also go bust, setting off a calamitous chain reaction. Thousands of engineering jobs are already under threat after Carillion – the UK’s second-largest construction company – went into liquidation on January 15 after amassing debts of more than £1 billion.
The size of Carillion meant collapse would be catastrophic
Carillion employs around 43,000 people worldwide, with an estimated 20,000 in the UK. A major supplier to the government, Carillion has worked on massive infrastructure projects including the HS2 rail project, along with prison and school building maintenance programmes.
Carillion’s business model involved the widespread use of local suppliers, many of them small and medium sized firms, that are now waiting to learn if they will be paid. An estimated 30,000 businesses are owed £1bn in unpaid bills.
Why the repercussions will be felt across the supply chain
The ramifications of Carillion’s collapse is likely to affect business of all sizes in a number of ways. For example, a squeeze on subcontractors’ cash-flow could mean difficulties in meeting their financial commitments. Meanwhile, smaller companies whose customers normally pay promptly may get paid late, or even not at all.
In these circumstances, staff may have to be laid off and businesses right along the supply chain could end up looking at insolvency proceedings.
The case must be put for sweeping reforms
While industry leaders agree that employees should be the priority, they are also quick to point out that if a player as big as Carillion can go bust, urgent reform is required. The industry needs to scrutinise present business models and contractual relationships to ensure they are sustainable going forward.
No doubt the delivery of major projects will be the short-term focus, but both industry and the government must address the problems that led to Carillion’s demise and produce a system that operates in the interests of the public and promotes responsible business practices.
What must be done to create a sustainable sector
The failure of Carillion represents the clearest and most compelling case possible for widespread industry reform. Many politicians point an accusing finger at Carillion’s senior management team, and for sure they must be held accountable. Nonetheless, there is a credible argument that Carillion fell foul of a business model that is simply not fit for purpose.
To start with, the industry and government should review the public-sector procurement model that encourages the transfer of risk along the supply chain. Carillion operated in a sector characterised by wafer-thin margins. Therefore, the accumulation of extra risk, especially in the context of big ticket contracts, could be viewed as dicing with disaster.
Looking to the future, it is clear that ‘another Carillion’ cannot be allowed to happen. A more resilient, flexible and sustainable business model must be introduced, with industry and the government working together to deliver essential changes.