More on Carillion’s Demise

There was some excellent commentary under yesterday’s post on the demise of Carillion. Graeme pointed out an enlightening passage in the company’s 2016 annual report, as well as some other stuff:

In 2016, we continued our journey towards greater diversity by increasing the proportion of female employees in the Group to 37.8 per cent (2015: 36.9 per cent) and the proportion of females in senior leadership roles was unchanged at 18 per cent. We have also launched our Diversity Strategy which sets out our corporate goals and introduces the concept of a Diversity Council in the UK that will represent all strands of diversity.

Target: Continue to drive greater (gender) diversity in our
business.

Our ‘unconscious bias’ training tackles diversity in
recruitment, and our award-winning ‘affinity networks’ (all started by our employees) have generated new thinking, including the launch of ‘Connect’ – our Lesbian, Gay, Bisexual and Transgender network.

Approaching graduate recruitment differently in 2016, we focused on behaviours instead of experience or qualifications, resulting in 70 applicants with the highest degree of gender and ethnic diversity to date.

Does this sound like a company whose core focus is on making a profit through getting the job done properly? As bobby b says, all this does is flag up a potential opportunity to short the company’s stock.

Bardon and David Moore weigh in on Carillion’s policy of not paying subcontractors in a timely manner:

My experience of UK construction payments was the average payment was received around 110 days after invoice. Carillion had a reputation as one of the worst payers, 180-200 days. A large part of their cashflow was generated by arbitraging between quick government payments and screwing contractors with long, long payment terms from what I understand.

Carillion liked to present themselves as a construction and support services business, but as I said in my previous post, it is likely they subcontracted the delivery of anything useful with Carillion themselves simply “managing” the process. But as David’s comment implies, they were less a construction company than a dodgy middleman who got themselves into a favoured position with government mandarins and made some percentage of their money through financial trickery which shafts those doing useful work. The money they made then got ploughed into corporate-level vanity projects, empire building, paper-shuffling, and virtue-signaling guff like Diversity Councils.

I suspect what I’ve described above could apply to many, many corporations with household names: they don’t actually do what they say they do, and what they actually do is engage in rent-seeking, pointless bureaucracy, and virtue-signaling, all of which is paid for using unsustainable and highly questionable financial practices. Hector Drummond provided a link to a good post on Carillion over at Raedwald’s blog (the whole post is worth reading, and the comments):

Balfour Beatty must be breathing a sigh of relief this morning that Carillion’s recent takeover bid was not successful. BB was lined up to follow Mowlem, McAlpine and Eaga to boost Carillion’s sales and potential profits in a process that only works so long as there are more companies with which to merge or take-over; once the music stops, the whole thing generally collapses.

Carillion was overburdened with debt and major construction contracts were simply not providing the profits to service them. This was disguised for a while by accounting for ‘other receivables’ i.e. money expected to be released from construction contracts, but never materialising. And this is a tale that is common throughout the construction industry.

I’ve written before about a future in which the brightest young folk will work in small 2-3 man teams feeding off the carcasses of bloated corporations harvesting legacy rents, and I think the example of Carillion only reinforces my belief. But as Bardon points out, those who will suffer the most from Carillion’s demise are those very same small companies who have performed good work in the expectation of pay which now they will never see. If these guys are going to succeed in future, they need to insist on better payment terms or learn to walk away from, or off, a job.

The payment of subcontractors is always a sore point on major projects. Back when I lived in Manchester I worked with an ex-BAe chap, and he told me his former employer was notorious for sending small suppliers into bankruptcy through not paying invoices. They didn’t do it on purpose, they just had a ludicrously slow and bureaucratic invoice processing system and sometimes it would take months or years to make the payments. For a small company on a tight cashflow with no reserves, timely payments are crucial, but the bureaucrats in BAe simply didn’t care.

In the oil and gas business, Korean companies are notoriously bad at paying their suppliers, often having no intention of doing so from the outset. I used to get the impression a Korean project manager thinks he’s done a good job if his suppliers are all bankrupt, negating the need to pay them. The more sensible oil companies take a dim view of this, realising that bankruptcies in the supply chain will ultimately hit them. I’ve even seen some clients go as far as guaranteeing the payments of subcontractors working under Korean EPC companies, but more usually they just shrug and say “nothing to do with us”.

Which is an interesting approach, firstly given how much it will ultimately bite them on the arse, and secondly from an ethics point of view. Somebody ought to be making more noise about the fact that the British government was happy to award contracts worth billions to Carillion, no doubt impressed by their diversity policies and office waste paper recycling initiatives, but wholly unconcerned that not paying their suppliers in a timely manner was standard practice.

Also in the comments was this from Andy in Japan:

One of the (many) reasons I consider myself to be an ex-libertarian is they ‘everything private good, everything state run bad’ mentality…it doesn’t matter anymore if it is a state of private run, the problem is the uselessness of British Management.

I agree with this: eventually any large organisation, unless ruthlessly led from a CEO who never loses focus, falls victim to basic human nature. It’s what I meant in my previous post when I said:

When mass-subcontracting…you need to be careful you’re not just replicating the problems of government-run bodies further down the contracting chain.

As the commenters under Raedwald’s post said:

One of the problems of the Civil Service, from personal experience, is that they will not take any risk that might rebound on the individual involved and thus they always tend to go to the biggest companies on the basis that “if it all goes pear shaped, we can’t be blamed as we went to the biggest company in the business”.

In the industry I worked in for a chunk of my working life the arse-covering was “No-one ever got fired for buying IBM”. I dare say every business sector has its own version.

The “biggest company in the business” is likely to be the most corrupt and worst managed. The larger an organisation, the more difficult it is to manage.

Government’s subcontracting services to the private sector doesn’t improve much if everyone is engaged in the same arse-covering as they were when it was done in-house.

Finally, also from Raedwald’s comments:

Are the board experts in m&a or construction.
If m&a, what are they doing at a construction firm?
If construction, why are they trying to run serial mergers?

They’re good questions. The only one I have left is how typical is Carillion of most of these giants of industry and commerce whose corporate brands are ubiquitous? I’d say there are an awful lot like Carillion, and worse.

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21 thoughts on “More on Carillion’s Demise

  1. In re: how will small companies survive when the big ones shaft them.

    They’ll survive two ways
    1) A yelp or glassdoor equivalent explicitly for contractors (possibly more than one in specific sectors/niches). Once you’ve shafted a few contractors word will get out and you won’t get any (or at least none that don’t insist on a large upfront payment before wok starts
    2) See the end of previous comment. Small sub contractors will refuse to work until they receive a significant up front payment. Also they will raise the price so that they break even on the up front payment and some profit assuming they get at least one intermediate payment

    As I was told about doing business in the Middle East. When asked for a price you quote them say 4 times what you expect to get paid. They bitch and moan and negotiate you down to 2-3 times. Then they don’t pay you until you stop work at a particularly inconvenient moment in the project. If you have more milestones you may be able to play this one a couple more times. You will however be screwed on the final “it all works” payment.

    At the end of the day you will get what you originally expected to be paid while they will feel satisfied that they shafted you on the final payment.

    I haven’t done that much work with Arab countries but this policy worked perfectly with Israeli (and FWIW French) contracts. We did have one Israeli company that broke the stereotype and paid all the tranches promptly including the final one. We gave them a significant discount when they wanted us to do follow-ups simply because we could trust them to pay

  2. Interestingly, having just come out of the end of a reasonably large government procurement process, a couple of the bidders actually guaranteed their payments to their sub-contractors in the event that we withheld a stage payment for fault.

    On the other hand, we had one customer whose Accounts Payable were simply incapable* of paying on time. So they kept getting ‘fines’ under the “Late Payment of Commercial Debts” rules. The Programme Manager didn’t have a finance code for these so eventually asked us to up our billing rate by £50 per day and agree to stop issuing the late payment invoices.

    * Technically not quite true. If the day the invoice was due was in the last week of the month and the last day of the month was a Thursday and they hadn’t cocked it up through simple incompetence, you did get paid on time.

  3. @Francs T

    We do a lot of contracts in the Mid East and one remedy that we prefer to get regards non payment and particularly for final payment is an “irrevocable letter of credit” from our client for the value of say 1.5 progress claims. It is quite common practice up there and minimises the no payment and the infamous last nonpayment trick.

    Australia has very effective laws to stop clients stuffing around with payment. Once an invoice is raised the client has two weeks to advise in writing on any deduction and reason to the claimed amount. The supplier then has two weeks to dispute the deduction by lodging a fast track adjudication. It takes a few days for an adjudicator to be appointed and both parties submit within two weeks. The adjudicator decides on the matter in say two weeks, based on the submissions and costs, the decision are binding on each party. I have used it a number of times and found it very effective, low cost and fast and haven’t lost one yet. The big guys are scared of it as the decisions are on the public record and it has stopped the whole scam of holding out on payment until the other party goes bust. It is a common threat that we use as well as long as you know what you are doing and dont submit spurious claims it is a fair system.

    It wouldn’t work in the Carillion situation as they have went into receivership.

    Maybe the UK has similar?

  4. A household name company Bardon will know was trading while insolvent 4 years ago. They got through the problem by blocking all accounts payable runs except for those suppliers who had put them on Stop Credit. We had sole traders at 120+ days delay. One or two of them physically visited the building, as you’d expect. Extra security guards were hired.

    The saving grace was an emergency contract win from the Federal government which didn’t go through the required tender process.

    The CFO responsible currently has the same position at one of the major commercial property management companies with some large shopping malls in his portfolio… in case any readers see similar behaviour.

  5. The CFO responsible currently has the same position at one of the major commercial property management companies with some major shopping malls in his portfolio

    These guys never seem to fall very far, do they? Wait for the headlines to die down, take another cushy position. Rinse, repeat.

  6. “These guys never seem to fall very far, do they? Wait for the headlines to die down, take another cushy position. Rinse, repeat.”

    My favourite example of that is Derek Wanless, a man for whom the term “merdeus touch” was surely invented.

  7. Not just BAe, but GEC-Marconi in the late 1980s/early 1990s when I worked there, were notoriously poor at paying invoices.

    This meant that, for instance, getting tools, materials and components for a trial either happened on cash terms, or didn’t happen: even the supplier across the road refused to accept orders or offer credit, it was cash-and-collect or no sale.

    Which meant, of course, the most junior engineer on the team had to spend most of a day doing the paperwork for a cash advance and getting management to authorise it, more time actually getting the cash with all the safeguards the company placed on handing over a few hundred quid in notes to an unworldly recent graduate, go to the supplier and buy the goods, then go through another day or so of reconciling assorted receipts and paperwork.

    I calculated that, conservatively, the £100 or so of kit we needed for a simple trial had ended up costing north of a thousand pounds once all the time spent on the internal administration for a cash purchase was added up; but at least we weren’t wasting money paying our bills on time! (Needless to say, this was all on a project code, so the customer got charged for all of it at cost plus overhead plus profit margin – this allegedly came to a screaming halt in 1993 or so when what was then MOD Pricing and Quality Services audited a project and started using words like “fraud”, “theft”, “criminal liability”, “loss of List X status”…)

  8. “That fast track adjudication legislation that I mentioned is for construction work only.”

    I’ve come across that legislation and it’s very effective if you’re in the construction industry. A bit frustrating if you’re not though.

  9. Welcome, Jason Lynch! I always liked your comments on the Royal Navy over at Mr Worstall’s place.

    Not just BAe, but GEC-Marconi in the late 1980s/early 1990s when I worked there, were notoriously poor at paying invoices.

    This surprises me slightly, mainly because I always assumed Lord Weinstock ran a tight ship. At least compared to his successor, which admittedly isn’t difficult.

  10. “I’ve come across that legislation and it’s very effective if you’re in the construction industry. A bit frustrating if you’re not though.”

    It’s also frustrating when you are used to working under it and then having to cop it on our overseas projects where we cant apply it and where adjudication legal costs quite often exceed the disputed amount. I have a current client that is listed on the Johannesburg Stock Exchange that is easily four months overdue on US $2.5m in certified payments for a project we completed for them in Africa, collection would be a slam dunk in Aussie.

  11. An additional thought I had today about a problem with all organisations is that they tend to get worse over time- for example changes are made, such are removing a perk of the job. Everyone bitches about it and the general feeling of ill will increases until staff leave, and their replacements who are none the wiser to how things used to be and accept this is the way things are. Rinse and repeat.

  12. An additional thought I had today about a problem with all organisations is that they tend to get worse over time

    The cycle I reckon is happening is as follows:

    1. Guy A with £50k mortgage, bitches a lot, gets things done, retires.
    2. Guy B replaces him with £100k mortgage, bitches a little less, gets a little less done, retires.
    3.
    4.
    5.
    6. Guy Z with £450k mortgage on a £70k salary remains absolutely and utterly compliant, terrified he might induce a bad remark from his manager which might lead to a bad appraisal which will put the shits right up him. Hence he doesn’t get a damned thing done.

  13. @Bardon

    “We do a lot of contracts in the Mid East and one remedy that we prefer to get regards non payment and particularly for final payment is an “irrevocable letter of credit” from our client for the value of say 1.5 progress claims. It is quite common practice up there and minimises the no payment and the infamous last nonpayment trick.”

    Good to know. Not sure if we could have convinced our clients to agree to one though

  14. For all those lefties fantasising about The State (peace be upon it) building skoolz n hoppitals directly, how on earth do they think it would work without subcontracting?

    Are they going to employ an army of builders, civil engineers, surveyors, project managers etc. directly? And buy or lease all the equipment? On time-limited contracts for the duration of the project? And have it all cost less? Or are they going to “buy in” the required services from people who have personal service companies (hmmm, sounds an awful lot like contracting/outsourcing…)?

    Most people don’t have the slightest clue how stuff actually happens… Can’t imagine a Council drone being able to manage all of that *and* not have it cost more than contracting.

  15. As anybody who has dealt with builders will know, there is a reason for paying after the work has been finished. If you pay up front they’ll mess about for a bit, say ‘looks alright to me’, then you’ll never see them again. There will be a corporate version of this.

    I knew a firm that always paid it’s bills at the last minute as policy. They were taken to county court by a supplier and lost, and as a result their credit score worsened and the insurance premiums that they paid to protect their pension fund went up.

  16. A couple of anecdotes from my varied and “non linear” working career.

    Greeks are also prone to not paying – I worked for a company that were marine consultants. The Greeks ordered a ship from a shipyard (this was when Britain still built ships) and required a top speed of 15 knots (relying on memory). We were appointed to supervise the trials and recorded that the ship in fact did something like 15.3 knots – which when you consider shoving 300,000 ton of steel through the water is not an inconsiderable gain.

    We submitted the report and got comments back “are you sure that the speed wasn’t 14.92 knots, or 14.85 knots?” etc. and so forth, back and forward. They wanted the evidence of the report to reject the ship as not being to specification and buy it back on a much reduced price as it failed to meet their requirements.

    Still waiting for payment for the work and the report but we did receive a Christmas card from them until I left – probably still do …

    The other concerns big government projects. Another firm I worked for was involved in motorway work for the UK Highways Agency. The civil service were extremely risk adverse and at the same time wanted ultra precision – e.g. “It will cost about 1.25 million”. They wanted a figure of 1,253,274.67p and if it came in at anything other than 1,253,274.67p then that was irrefutable evidence of us being either incompetent or rip off merchants. They would never refuse either coffee or another meeting … Happy daze (NOT!). They had neither been trained in contract negotiation and interpretation nor project management so they treated us like con merchants that they simply had not caught cheating. Not a good atmosphere to work under.

    When firms ask me for 90 day payment terms I am always delighted to suggest 120 or even 180 day terms. When their eyes light up and they agree I smile broadly and say “Great! Pay the cash to me now and I’ll do the work/deliver in that timescale”. Then agree to cash with order and then the terms of the contract. I’ve been caught out once or twice too often to want to repeat the experience.

    Oh, and a “Bad Times Coming” yardstick can be found here:

    http://www.weeklystandard.com/mermaid-academies-are-a-thing.-why-you-should-be-afraid./article/2011162

    Can’t say I disagree! >};o)

  17. One thing I’ve always found incredibly embarrassing and frustrating is working for the sort of company that demands superhuman efforts from their subcontractors but then delays payment. My usual role is project engineer so I’m generally the one dealing directly with the subbie (but not dealing directly with the invoicing, other than to confirm the work is done and to spec). I’ve had one ring me almost in tears – he was being constantly pressured to get assembly done faster, had hired guys on overtime, etc, but was getting stiffed on his variation claims. He was basically on the verge of going broke. I went and raised hell on his behalf and it got fixed, but I virtually had to threaten to withhold my own labour before it happened.
    It’s not just late payment either. I’ve worked for companies where even getting a simple purchase order out took literally weeks. One such company was in a similar outfit to Carillion, a private rail operator contracted to the government. I once got a small, $50k PO out in less than 4 weeks. No contracts were involved, it was just for off the shelf materials. This was regarded with awe by long term employees as something of a record! Suppliers were used to to waiting three months to even get an order, let alone payment. Some would routinely deliver stuff without an order so they didn’t get bad mouthed as the reason for a delay. My approach was simple – put in the purchase requisition, document it to all and sundry, then tell the supplier I wouldn’t accept their delivery until they received the order. Then frequently push out the end date for the work by exactly the amount of time the order was taking to process. This worked pretty well, when a project manager sees his programme pushing out on a daily basis you get their attention and some real pressure applied those responsible.
    Of course, my temporary boss (I was on secondment) tried to tell me that I should accept the delay was inevitable and submit the requisitions earlier to compensate. I believe I laughed.

  18. Good on you Ltw, there is definitely a culture of screw the subby out there with some organisations promoting it as a value and subby scalps considered as some kind of badge of honour. I have literally seen every trick under the book having worked on both sides of the equation in delaying or avoiding payments.

    I have a claim on a project happening right now against one of the big ones, we struck rock that has stopped us dead, had to abandon and make safe the work to date, get other equipment and start again. The contract geological data states the ground is soft and about 1MPa compressive strength we have test done at around 60MPa a dead set latent condition claim. Our client wrote back to us yesterday saying that they might pay some costs but won’t give us an extension of time and pointed out the liquidated damages amount that they can apply for us running over the original contract completion date. Basically, trying to offset our additional costs against their so called liquidated damages. I pulled the contract out and although I have checked it before it is quite daunting as the agreement doesn’t actually mention that many obligations that they have. Anyhow we have written back pointing out that their omission to provide us accurate geotechnical information that reflects the actual ground conditions is an omission on their part, which in accordance with the contract is an Act of Prevention which triggers an extension of time. The point being it’s all hard fought for and not won yet.

    By the way I have shares in this company and they are one of my best performers!

  19. My approach was simple – put in the purchase requisition, document it to all and sundry, then tell the supplier I wouldn’t accept their delivery until they received the order. Then frequently push out the end date for the work by exactly the amount of time the order was taking to process. This worked pretty well, when a project manager sees his programme pushing out on a daily basis you get their attention and some real pressure applied those responsible.

    Good lad! That’s exactly what I do, too.

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