Plan Insurance Blog

How Has Construction Changed Since The Carillion Disaster?

Five years ago, Carillion, a massive construction company, collapsed amid a big scandal.

When it went bust, the company was estimated to have around £7bn in debts and liabilities. It was known to have 30,000 suppliers. This led to a domino effect of financial disasters for those further down the food chain. Many blamed the giant firm for gambling on big contracts that it couldn’t afford, a practice seen across the whole industry.

It prompted many to look at the practices of an industry that allowed this magnificent rise and fall.

The offsite working of the construction world

Barry Ashmore, who runs a consultancy that advises small businesses on contractual issues, says bad practices result from a construction industry without proper regulation. There is no one truly policing the industry, resulting in the mistreatment of subcontractors.

The construction industry operates like a pyramid, where clients commission architects to create plans, and then hire main contractors such as Carillion to carry out the work. These contractors, in turn, hire subcontractors who specialise in specific trades like plumbing or electrical work. Subcontractors range from small one-person businesses to mid-sized companies with large turnovers.

Some contractors are blamed for what many call ‘subby bashing’. This is the established practice of withholding payment, or pushing subcontractors into unfavourable contracts.

Subcontractors clearly play a central role in completing the countless multi-million-pound projects across the country. Surely something needs to be done to prohibit this strong-arm tactic being common place?

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The human effect of the power imbalance

Michael Corridan owned a demolition business. He started the company 1986. On a Thursday morning in 2016 the company calmly told Michael that they weren’t going to pay a huge bill. The company was about to collapse. The effects on him weren’t just financial, an hour later Michael had a stroke. He speaks openly about struggling both physically and mentally after his business went under, and the long road to recovery.

Michael now advises other construction firms on how they can avoid a similar fate. Unfortunately, Michael’s situation isn’t uncommon. Skilled construction roles had the highest rate of male suicide of any occupation in 2021, according to data from the Office for National Statistics.

It’s clear that mental health is a real problem in construction. Many blame this on the increasing pricing competitiveness at the top, making life harder and harder for those working on-site. As they compete to offer the lowest price, main contractors work on smaller and smaller margins. Subcontractors at the bottom are the ones who suffer, having to work for less and under worse conditions.

There’s big money involved, but very little profit for most

Carillion took on contracts too cheaply that were genuinely unprofitable for them. Instead, they would withhold cash from their suppliers (i.e. the contractors). After the company folded, it left hordes of late and unpaid invoices. An MP said in a report that ‘it treated suppliers with contempt’.

Many reading this will ask – why do companies take contracts that don’t make them a profit? Many contractors have staff to pay, and would rather have money flowing through the business than people being paid salaries to sit twiddling their thumbs.

This means that contractors in the middle often don’t discern between good and bad quality work, Without work they will have to lay people off and their businesses will eventually crumble.

Many believe the main clients are really to blame. In one case the client (a government department) estimated the work would cost £130 million, but the winning bid was for £46 million. The government department agreed because on the surface it appeared a good deal for them. In reality, they were taking part in a flawed process and a project that never really stood a chance of being delivered on budget.

The Legacy of Carillion

Many industry insiders told The Times that Carillion’s demise had meant that, in general, people were being paid faster. There has been positive changes for small contractors and subcontractors, but there is still a long way to go.

The Prompt Payment Code was introduced in 2008, but the Department for Business, Energy & Industrial Strategy said it was reviewing the code and other payment practices to “make sure small firms are not ripped off by their larger clients”.

The managing director of one company also highlighted that deceit and foul play works both ways. He said that many subcontractors claim to be qualified to win jobs, and end up costing the client more. That could be considered more of day-to-day issue with having processes in place to vet firms appropriately before hiring their services.

It seems imperative for the industry as a whole that a top-down solution can be implemented. Ideally it would be one that ensures fair trading conditions for firms of all sizes. It remains to be seen whether it requires an industry regulator or if existing protocols can be made more robust.

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