If you work in the construction industry, then the collapse of the UK’s largest construction firm is unlikely to have escaped your notice. The company, the second largest in the UK, went into liquidation on January 15th.
The news not only sent shockwaves through the UK, but around the world, not least because nearly half of Carillion’s employees work outside of the United Kingdom. When a company of this size and prestige fails, it’s inevitable that anyone involved in the construction industry is forced to examine their own circumstances– if a company the size of Carillion can collapse, what hope is there for everyone else?
First and foremost, it’s important to remember that the Carillion collapse is still in a phase where shock and confusion is the overriding feeling. No one is entirely sure what caused such a huge company to fail; there are signs (which we’ll discuss), but no definitive answers at this point. The issue is particularly problematic given that the topic has become something of a political football, with Prime Minister Theresa May forced to issue statements about the future of corporate rules and responsibilities.
Perhaps the most troubling aspect of the Carillion collapse is that it has not failed for the obvious issues that plague construction companies. It has not failed due to a lack of contracts, or by breaking rules and ignoring advice of construction safety officers; it’s failed for entirely unique reasons. Let’s try and push aside the political arguments and general confusion to extract some of the vital lessons that all construction companies should take to heart.
#1 – Don’t rely on large contracts
Carillion’s business was primarily derived from huge contracts, which sounds like a good thing for a business, but has actually proved to be damaging. When those large contracts weren’t quite as profitable as the company expected, the impact on the company finances was catastrophic. While it’s good to deal with large, dominant contracts, you’re also going to want to ensure that your contracts are diverse in both size and number of clients. Carillion over-relied on contracts from the UK government, which has been a significant contributory factor to its downfall.
#2 – Government money isn’t as “safe” as the construction industry suggests
Many construction businesses long for the safety of government contracts. Governments, after all, are unlikely to collapse, so they seem like a good bet as a client.
However, as the aftermath of the collapse has shown, government spending is a political hot potato that can threaten to swallow a company whole. If you accept contracts for unpopular projects, then the government can pull the plug due to public demand, and your work vanishes overnight.
#3 – High margins are only beneficial if they are paid
Carillion often reported profit margins of 4%, which is double the average for the construction industry. This sounds fantastic, and led to overconfidence in the company… but too many of those high-margin contracts never actually resulted in payment. The company was said to be owed around £400 million ($557 million) from Middle Eastern developments prior to the liquidation, so while those high margins looked good on paper, they actually caused severe harm when payments were not met.
Carillion’s collapse has proven that no construction business is “too big to fail”. By ensuring you diversify your projects and resist the urge to become overconfident when it seems like things are going well, your company can avoid following in their footsteps.