It is now more than a week since the shock collapse of construction giant Carillion, mired in £1.5bn debt. Everyone and their dog has had their say, laying blame almost everywhere, including at the feet of capitalism.
But now the dust is settling, it is important our sector studies the events leading to the firm’s demise and tries to understand what really led to this dramatic event.
Only when we truly understand the reasons that brought this great business to its knees, will we be in a position to prevent similar situations occurring in the future.
The company was engaged in a variety of high-profile public-sector contracts from helping with the construction of the HS2 rail link to delivering school meals, maintaining prisons and building new hospitals. In the past it has done big contracts well.
Carillion’s collapse has thrown some 43,000 jobs into serious doubt, with 20,000 of those workers based in the UK.
Despite crisis talks between the firm, its lenders and the government, a deal to save the UK’s second largest construction company could not be agreed and it seems Carillion’s doors have permanently closed with no way back for the crippled firm.
While competing companies may see this news as an opportunity, it is important to recognise and acknowledge the serious fundamental issues that have allowed a company with such influence to collapse so dramatically.
One of the most interesting points to consider, is the ‘too big to fail’ mentality, which for decades seems to have been held in high esteem, and often used as justification for trusting companies with important, lucrative contracts.
It’s a strange concept to consider, as the size of a company and its history of delivering high quality work should usually reflect a financially strong business, capable of completing new high-profile contracts.
However, investing and trusting solely based on a company’s reputation can be a dangerous business, as proven in the case of Carillion.
It’s a sobering wake up call to the industry, that although an organisation may have an impressive track record, it’s still important to do proper due diligence, looking at the company’s financial status before making any big decisions.
The key thing to remember is that often the size of a business has no real bearing on how big an investment risk it is – unfortunately, this dangerous ‘too big to fail’ mindset has thrown the livelihoods of suppliers and employees into serious jeopardy.
The loss of smaller companies is keenly felt by those involved, but it is much easier to pick up the pieces afterwards. Contracts can be quickly re-tendered for or taken on by bigger businesses with available resources.
Big isn’t always beautiful and the ‘economies of scale’ argument has received a nasty rebuttal. Perhaps now is the time to limit the number and size of contracts any contractor can take on, at any given time.
Is it time for a Basel III style regulatory framework on capital adequacy in the construction sector, like that faced by the banks?
When a global organisation like Carillion fails, it is a reminder to all businesses of the risks faced within the industry, and the serious financial issues that can arise if projects are mismanaged and costs are miscalculated.
While it would be unfair to prematurely point the finger before the full details have been released, it is important that companies, employees, investors and the industry as a whole, changes the way it works to ensure similar events don’t occur again.
Allowing time to consider options, and properly researching the financial stability of companies before awarding lucrative contracts can help improve the problem for now, ensuring important contracts are in capable hands and are completed on time; without interruption.
