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The collapse of Carillion: a conspiracy of optimism?

Monday 15 January 2018 saw the final collapse of Carillion, the behemoth construction firm. Ultimately, the company was forced into liquidation as it was unable to service debts which had spiralled to over £1 billion while its market capitalisation was in freefall.

The post-mortem into the company’s demise is at a very early stage, although the cracks had been visible for some time. What is clear at this stage is the Carillion was brought down by a combination of hubris (over-reaching on its project portfolio and a run of acquisitions); low profit margins (pricing low to build revenue); and project overruns (with schedule and budget blowouts leading to cost growth).

Much has been made in recent days of the critical role that Carillion has played in building public infrastructure and delivering public services. So, its failure matters. Questions are beginning to be asked about why the UK government was not more diligent in ensuring the ability of one its largest contractors to deliver on its obligations.

In a way, it is perhaps depressingly predictable that government (as customer) and Carillion (as private sector partner) unwittingly co-operated to underestimate the risks inherent on the major infrastructure projects that sunk Carillion. The customer wants to believe that a project can be delivered at an affordable price and at the same the supplier can have an overriding desire to win the work. Complex programmes such as hospital builds or highway construction will often have significant risks and uncertainties associated with the outturn cost, which means that there are many more ‘high cost scenarios’ than ‘low cost scenarios’. And despite talk about transfer of risk to the private sector; if a major public-sector partner goes belly up then government departments can be left holding the baby.

What next then? It is important to understand that this kind of conspiracy of optimism can be fiendishly hard to avoid. But in the wake of another corporate meltdown, policy-makers need to try and find a solution.

Matt Bassford is Director of Strategy Consulting at Vedette