- Project plans
- Project activities
- Legislation and standards
- Industry context
Last edited 15 Aug 2018
On 15 January 2018, a winding up order was made against integrated support services business Carillion Plc and the Official Receiver was appointed by the court as the liquidator. PwC will act on behalf of the Official Receiver, and they have set up a website to provide more information as it becomes available: https://www.pwc.co.uk/carillion.
A web page has also been set up by the Insolvency Service for those affected: https://www.gov.uk/government/news/carillion-declares-insolvency-information-for-employees-creditors-and-suppliers
Carillion employs 43,000 people, operating in the UK, Canada and Middle East, and has annual revenues of more than £5bn. It offers support services, project finance and construction, working in a number of key business segments:
- Facilities management.
- Energy services.
- Rail services.
- Road maintenance.
- Public Private Partnership (PPP) projects, including; defence, health, education and transport.
- Construction services, including; consultancy, building, civil engineering and development.
Carillion was established in 1999 by the separation of the Tarmac Group into Tarmac, a materials company, and Carillion, a support and construction services company. Carillion went on to acquire Mowlem in 2006, Alfred McAlpine and Vanbots in 2008 and Eaga in 2011.
However, the company made a pre-tax loss of £1.1bn in the first half of 2017 and owes £900m to RBS, Barclays, HSBC, Lloyds and Santander. It also has a £600m pension deficit. Discussions about a rescue package failed to reach agreement to save the company. PwC stated that; 'unfortunately, as a result of the liquidation appointments, there is no prospect of any return to shareholders'.
Employees, agents and subcontractors are being asked to continue to work as normal, and PwC have confirmed they will be paid for the work they do during the liquidation.
Projects Carillion is involved in that will cause concern to the government include the HS2 high-speed rail line, and the management of schools and prisons. It has been suggested that some of these contracts could be taken on by other companies, and some might be taken under government control, with the government already having committed to provide funding to maintain public services run by Carillion.
Chairman of Carillion, Philip Green said: “Over recent months huge efforts have been made to restructure Carillion to deliver its sustainable future... In recent days however we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision. We understand that HM Government will be providing the necessary funding required by the Official Receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers.”
However, the Labour Party has asked whether proper due diligence was carried out before £2bn of contracts were awarded to Carillion, which has been known to be in financial difficulties for some time, It issued its first profit warning in July 2017. A week later, it was part of a joint venture awarded a £1.4bn contract for HS2. Further profit warnings were issued by the company in September and November 2017.
Shadow Cabinet Office minister, Jon Trickett said; “Alarm bells have been ringing for over six months about the state of Carillion’s finances, so the government must come forward and answer questions on exactly what due diligence measures were undertaken before awarding contracts to Carillion worth billions of taxpayers’ money.”
 January 2018
David Birne, insolvency partner at H W Fisher & Company said; “For a company of Carillion’s size, it is extremely rare to opt for a liquidation rather than an administration – and a compulsory liquidation at that. It suggests there is little, if anything, of value within the company to be saved. Almost every big insolvency in recent years has been a move towards administration rather than liquidation. (Ref. http://www.constructionmanagermagazine.com/news/it-extremely-rare-opt-liquidation/)
It was later reported that by 15 January, Carillion's remaining funds stood at just £29 million, giving it insufficient cash to appoint an administrator.
In the immediate aftermath of Carillion's collapse, concerns have been raised about the number of suppliers and other small businesses who may face bankruptcy. In 2016, Carillion spent £952m with local suppliers and an extensive network of SMEs, with Build UK estimating that 25,000-30,000 firms could be awaiting payment.
In the Commons, Cabinet Office minister David Lidington was forced to defend the government against accusations of a lack of oversight in awarding Carillion further public sector contracts despite profit warnings. Mr Lidington said that the government would pay employees and small businesses working on the firm's public contracts, however, companies working on private projects would only receive a 48-hour 'grace period'.
The Labour leader, Jeremy Corbyn, called Carillion’s collapse a “watershed moment”, adding that it was “time to put an end to the rip-off privatisation policies that have done serious damage to our public services and fleeced the public of billions of pounds”.
Vince Cable, the Liberal Democrat leader who, as Business Secretary in the coalition government awarded several PFI contracts to Carillion, said: “The government has mismanaged contracts so that fat cat bosses are able to get away with millions, hedge funds are able to make millions, while their jobs are at risk.”
On 16 January, Business Secretary Greg Clark confirmed he had asked the Insolvency Service to fast-track an investigation into Carillion’s directors and to broaden the scope to include previously-employed directors. He also wrote to the Financial Reporting Council (FRC), asking it to conduct an investigation into the preparation of Carillion’s accounts, as well as the company’s auditors. (Ref. https://www.gov.uk/government/news/business-secretary-outlines-departmental-action-following-carillion-liquidation)
On 16 January, Carillion Canada, which employs 6,000 people released a statement clarifying that; "...Carillion's Canadian operations are not in liquidation and continue uninterrupted. Our employees, subcontractors and suppliers in Canada continue to be paid and we remain committed to delivering safe, quality services for our clients. Our Canadian leadership is currently assessing the situation and working with stakeholders to ensure continuity of operations." (Ref. http://www.carillion.ca/news-and-media/news/2018/update-on-carillions-canadian-operations.aspx#.WmDH26hl_7B)
On 17 January, it was announced that Lloyds Banking Group, HSBC and RBS had set up finds totalling £225m to help Carillion subcontractors, and that they would waive fees and suspend loan repayments where necessary. (Ref. https://www.gov.uk/government/news/business-secretary-welcomes-action-by-banks-to-support-small-businesses-affected-by-carillion)
On 18 January, the Business Secretary Greg Clark chaired a new taskforce which was set up to monitor and advise on mitigating the impacts of Carillion’s liquidation on construction firms, particularly SMEs and those working in the sector. The taskforce’s attendees included representatives from leading business bodies, the construction trade sector, unions, banks and government.
The taskforce will act as a means to collaborate and ensure the impact of the Carillion insolvency on the firm’s employees in the private, as well as public, sector is minimised and to help them recover. (Ref. https://www.gov.uk/government/news/business-secretary-chairs-first-taskforce-to-support-small-businesses-and-workers-affected-by-carillion-insolvency)
 February 2018
On the 2nd February 2018, the Official Receiver said that more than 919 jobs have been saved, but that 377 more have been made redundant and are now being told to contact the JobCentre. Those whose jobs have been saved are being transferred to new employers who have taken on the infrastructure, central and local government, and construction contracts.
Regarding the remaining Carillion staff employed in the UK, of which there were almost 20,000, a spokesperson for the Official Receiver said:
“I am expecting many employees working on other Carillion contracts to transfer in the coming weeks and we are continuing to keep the workforce updated as these are arrangements are finalised.”
On 5 February 2018, it was announced that a further 452 employees had been made redundant, whilst a further 100 employees jobs have been saved.
On 8 February 2018, the Official Receiver, announced it had safeguarded a further 1,221 jobs but that an additional 101 employees had been made redundant.
On 20 February 2018, a fresh round of 152 job-cuts took the total number of redundancies to 1,141. The Official Receiver also confirmed that 7,610 jobs have been saved, most from support services. Meanwhile, legal firm Clifford Chance purchased Carillion Advice Services, set up in 2011 as a stand-alone business to support Carillion’s in-house legal team.
On 27 February 2018, the Official Receiver confirmed a further 230 redundancies, taking the total to 1,371. There were criticisms from employees for the lack of organisation and information, claiming that the announcement was posted on the Receiver's website in advance of staff being told directly.
On 8 March 2018, the Canadian facilities management (FM) and real estate group Brookfield Global Integrated Solutions (BGIS) announced that the deal to buy FM contracts was off because 'certain closing conditions have not been met'.
The surprise about-turn, rejecting contracts serving hospitals, prisons, schools, transport and emergency services, could result in the loss of a further 2,500 jobs. BGIS did not expand on what those closing conditions were, but it is believed that they involve guarantees of continued business.
On 6 February 2018, a joint inquiry by two Commons select committees held its first session, with evidence provided to MPs from seven former Carillion directors.
Reflecting on how Carillion's debts amounted along with its pension deficit, the Work and Pensions Committee chair Frank Field accused the former finance director Zafar Khan of being "asleep at the wheel". Khan denied the accusation.
Keith Cochrane, who was appointed interim Chief Executive after the group issued its July 2017 profit warning, conceded that if they had suspended shareholder dividends it "would have made a difference, possibly". But he denied prioritising the interests of shareholders above those of the 27,000 pension scheme members.
Regarding whether the board should have done more to raise flags about Carillion's position, Cochrane said; “Clearly with the benefit of hindsight, should the board have been asking further, more probing questions, perhaps... Clearly the business did have issues. Do I wish we’d done something about it sooner, absolutely. At the time, all the decisions I took were seeking to do the best thing for the business.”
On 28 February 2018, the minutes from Carillion's board meetings revealed that former chairman Philip Green had been planning an 'upbeat announcement' to the City of London just five days before unveiling a write-down of £845m. In addition, the board had rejected advice from brokers that emergency funds would not be able to be raised. The board dismissed the advice as 'not credible' before hiring alternative advisers.
In response, Frank Field, the chair of the work and pensions committee, said: “Carillion’s chair appeared to lack even a tenuous grasp on the reality of the company’s situation ... It is difficult to believe the chairman of the company was unaware of its position, but equally difficult to comprehend his assessment if he was.”
On 7 February 2018, the extent of the claims being pursued by Carillion's board were revealed in the business plan that had been put to banks and government prior to its collapse. Totalling some £262 million, the seven major contract claims that Carillion believed it would receive were:
- Midlands Metropolitan Hospital – £33m (problems with building services).
- Royal Liverpool Hospital – £43m (including recovery of claims following problems with concrete beams).
- Aberdeen Western Peripheral Route – £40m
- Battersea Power Station – £16m (phase one was delivered nearly a year late).
- PF2 Schools – £5m
- Msheireb, Qatar – £97m
- Toronto Transit Commission £28m
However, Msheireb disputed the clam that they had not paid Carillion, telling the Guardian newspaper that; "Despite ongoing project delay, Msheireb Properties continued to pay Carillion; however, Carillion did not pass these funds on to its supply chain, leaving over 40 subcontractors unpaid."
They later told the inquiry that they themselves were owed millions by Carillion, including £47m in liquidated damages. Inquiry chair Frank Field said; "This extraordinary exchange reinforces the impression that the upper reaches of Carillion was stocked with fantasists. It takes a special kind of optimism…to classify money one hopes to earn in the future, on a challenging project, as money ‘owed’ to you."
 March 2018
The co-chair of the parliamentary inquiry Frank Field MP, lambasted the professional services firm PwC for "milking the Carillion cow dry" in their dealings with the company's collapse. PwC advised Carillion's directors on managing pensions liabilities from 2012 to 2017, and had advised the government on its dealings with Carillion.
Field said that, “then, when Carillion finally collapsed, PwC adroitly re-emerged as butcher, packaging up joints of the fallen beast to be flogged off. For this they are handsomely rewarded by the taxpayer. They claim to be experts in every aspect of company management. They’re certainly experts in ensuring they get their cut at every stage.”
The joint committee inquiry investigating Carillion's collapse published new evidence in March illustrating the extent to which the company safeguarded the bonus rewards for its top executives.
After his contract was terminated, the share-related bonuses for former-CEO Richard Howson were to be deposited into an account that would not have to be disclosed to shareholders. In addition, senior staff were awarded retention bonuses and salary increases in an attempt to prevent multiple resignations following the first shock profit warning being issued. The contracts of senior staff were also written in such a way as to make it difficult to claim back bonuses for any wrongdoing.
The inquiry also found that Carillion's board had tried to increase the maximum bonus level to 150%, although resistance forced the percentage back down to 100%.
The inquiry said that the evidence seemed to reinforce the view that Carillion's board was more concerned with “how to remunerate executives rather than what was going on with the business”. Frank Field MP called it “greed on stilts, pure and simple.”
 April 2018
An Official Receiver update reported that nearly 10,000 former Carillion employees have managed to obtain new secure employment through the transfer of contracts. That accounts for more than half (54%) of the pre-liquidation workforce. However, there have been approximately 1,800 redundancies.
These figures exclude those jobs which are attached to contracts where an intention to purchase has been entered into but has not yet formerly occurred.
On 16th April 2018, the Official Receiver revealed that, when it collapsed, Carillion's construction arm had liabilities that were far higher than had been previously thought.
Accounts had previously claimed liabilities of £2 billion at the end of 2016. However, a letter from the Official Receiver estimated that total liabilities could be as high as nearly £7bn.
This could mean that banks, pension funds and subcontractors who were owed money by Carillion at the time of the firm's collapse may struggle to recoup the amounts owed. Assets that are due to be sold are expected to only realise a fraction of the firm's total liabilities.
 May 2018
On 16 May 2018, the final report from both the business and work and pensions committees into Carillion was published, concluding that the collapse was the result of 'recklessness, hubris and greed' among directors.
In a highly critical report, the directors were lambasted for having put their personal financial rewards ahead of other concerns, and for paying out dividends based on profits that were supported by exploiting suppliers. The former finance director Richard Adam, ex-chief executive Richard Howson, and former chairman Philip Green were judged to have 'driven Carillion off a cliff and then tried to blame everyone but themselves.' The report recommended that the Insolvency Service consider barring them from accepting directorships in the future.
The report said that the board had treated suppliers with 'contempt' and had 'abused [its] dominant market position' by making them wait for payment and 'quibbled with invoices to avoid prompt payments'. Carillion's early payment facility was also heavily criticised.
But while the report described the board as 'both responsible and culpable for the company's failure', it also reserved criticism for the 'big four' accountancy firms - PwC, KPMG, Deloitte and EY - accusing them of operating as a 'cosy club'. The report claimed that KPMG had been 'complicit' in signing off the 'increasingly fantastical figures' presented by Carillion, while internal auditor Deloitte had failed to identify, or had 'readily ignored' the 'terminal failings' in risk management and financial controls.
The report recommended that the competition regulator consider whether the 'big four' should be forcibly broken up to increase competition. In addition, there was calls for a government investigation and overhaul of the corporate culture, warning that without governance reforms 'Carillion could happen again, and soon'.
The government must formally respond to the report within two months.
You can read the report here.
 Crown representatives
On 30th May 2018, the chairs of the two committees that published the joint report sent a follow-up letter to the Cabinet Office recommending that the role and responsibilities of crown representatives should be overhauled.
Frank Field and Rachel Reeves wrote that the government's system of having crown representatives in the Cabinet Office to monitor the performance of contractors should be urgently reviewed to ensure that issues relating to other strategic suppliers can be detected and dealt with much earlier than they were in the case of Carillion.
'The assignment of a crown representative to Carillion served no noticeable purpose in alerting the government to potential issues in advance of company’s July 2017 profit warning. The absence of one between August and November 2017 cannot have increased the Government’s ability to keep itself informed of the direction of the company during a critical period before its collapse. This review should consider whether devoting more resources to liaison with strategic suppliers would offer better value for the taxpayer.'
In their follow-up letter, the chairs enquired about the failure of the system to respond to the problems faced by Carillion - 'the September 2016 assessment is still quoting Carillion’s total revenue figure from the 2014 accounts despite the 2015 accounts having been published back in March 2016. Is this an isolated case or are all strategic supplier risk assessments based on out-of-date financial data?'
 June 2018
On 7 June 2018, the National Audit Office (NAO) published an 'Investigation into the government’s handling of the collapse of Carillion' suggesting that the cost to the taxpayer would be £148 million. (Ref. https://www.nao.org.uk/report/investigation-into-the-governments-handling-of-the-collapse-of-carillion/)
 July 2018
 After Carillion report
On 9 July 2018, the Public Administration and Constitutional Affairs Committee (PACAC) published its inquiry into Carillion's insolvency. The committee of cross-party backbench MPs were damning about the government's focus on lowest price tenders and warned that it could happen again unless lessons are learned.
After Carillion: Public Sector Outsourcing and Contracting, concluded that the government was right to allow the failure of Carillion, but that there needs to be a re-think about how projects and services are procured. It said; '[the] government’s overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial risk.'
It also criticised private finance initiatives (PFI), stating; '...it is unacceptable that almost 30 years after the first PFI projects were initiated, the Treasury cannot produce an evidence base to support its claims that PFI is worthwhile for any reason apart from the fact that it takes debt off balance sheet.'
According to the Chair of PACAC, Sir Bernard Jenkin MP, "..it is staggering that the government has attempted to push risks that it does not understand onto contractors, and has so misunderstood its costs. The Carillion crisis itself was well-managed, but it could happen again unless lessons are learned about risk and contract management and the strengths and weaknesses of the sector."
 Chief Executive defence
In July 2018, a letter of defence from former Carillion chief executive Richard Howson was published by the Parliamentary enquiry into the collapse. In it, he blamed the government's payment practices, describing them as being a 'poor payer' and stating that they often underestimated the amount of work awarded to contractors.
Writing that fear of losing future work prevented Carillion from starting litigation procedures against the government, Howson said that there were 'very significant discrepancies between the contracted scope and the actual scope of the Government Estate' on several services contracts.
'Carillion was expected to fund the extra work for months and occasionally years, before the government paid us for additional work and substantial sums were still outstanding when I left the business [September 2017]. In the meantime, Carillion funded its suppliers on these contracts from its own funds.
'At the time of my departure substantial amounts were properly due to Carillion under the contract from Government, or from Government-owned or majority-owned entities on a range of contracts.
'I understand from concerns raised with me by senior members of the Carillion team present at the point of the liquidation that similar large amounts were still outstanding.'
 Related articles on Designing Buildings Wiki
- Advance payment bond.
- Battersea Power Station.
- Capita plc.
- Collateral warranties.
- Crown Representative.
- Liquidation of contractors in the construction industry.
- Off site goods and materials.
- Off-site goods and materials - legal issues.
- Parent company guarantee.
- Performance bonds.
- Project bank accounts.
- Retention of title.
- Step in rights.
- Supply chain.
- The problems with retention.
- Vesting certificate.
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