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Mon November 23 2020

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Carillion collapse pushes reform up the agenda

16 Jan 18 The government has agreed to look again at the whole question of construction procurement and the construction industry model in the wake of the collapse of Carillion.

Cabinet Office minister David Liddington has acknowledged the need for “a fresh look at how the government go about the contracting process”.

He has also promised to consider government adoption of the Aldous bill that seeks to protect retention monies.

Mr Liddington told the House of Commons yesterday evening, on the day that news broke that Carillion was being liquidated, of plans to protect public services being delivered by Carillion. However, there is no such rescue package for Carillion's private sector contracts, which make up the majority of its business.

The minister said: "The action we have taken is designed to keep vital public services running, rather than to provide a bail-out on the failure of a commercial company. The role of the government is to plan and prepare for the continuing delivery of public services that are dependent on these contracts, and that is what we have done. The cause of Carillion’s financial difficulties is, for the most part, connected not with its government contracts, but with other parts of its business. Private sector contracts account for more than 60% of the company’s revenue, and the vast majority of the problems the company has encountered come from these contracts rather than the public sector."

The government has told the official receiver that its “top priority is to safeguard the continuity of public services”, the minister said.

“The official receiver will now take over the running of services for a period following the insolvency of the company,” Mr Liddington told the House of Commons. “The government will support the official receiver to provide these public services until a suitable alternative is found, either through another contractor or through in-house provision. The court appointment of the official receiver will allow us to protect the uninterrupted delivery of public services — something that would not have been possible under a normal liquidation process.”

All of which means that there is little by way of government support for Carillion suppliers and employees working in the private sector – other than a helpline it has set up using Jobcentre Plus.

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In the questioning that followed the ministerial statement, New Forest West MP Sir Desmond Swayne questioned whether perhaps companies were winning contracts on prices they were unable to deliver on. “Is my right hon. Friend confident that we are capable of recognising when companies are bidding too aggressively?” he asked.

Mr Lidington replied: “When the initial situation has stabilised there will be a need to take a fresh look at how the government go about the contracting process. We will certainly wish to take into account the point [he] makes.”

The minister was also asked by Waveney MP Peter Aldous if the government would now adopt the private bill that he introduced last week to amend the Construction Act to protect retention monies. Mr Liddington said that he would certainly look at it and discuss it with colleagues.

There certainly seems to be support for reform. Trade group Build UK, which counted Carillion among its members, said: “Today’s news raises further serious questions about the construction industry’s business mode.”

Mathew Riley, managing director of Ramboll and chair of Association for Consultancy and Engineering (ACE), said: “If ever we needed more evidence and examples of the need for industry reform, this is it! Carillion are a good company with a long heritage but are the victim of an industry business model that doesn’t work. It was an accident waiting to happen.”

He added: “Public sector procurement is part of the problem and the way they have sought to manage, share and transfer risk through the supply chain. For an industry that operates on wafer thin margins, to take on more risk, particularly for high value contracts, was always a dangerous strategy. We need a more sustainable business model moving forward and the government need to play a more active role in helping the industry to perform.

“The construction industry is facing a lot of converging forces; the need for increased productivity, the uncertainty from Brexit, the opportunities around disruptive technologies, tackling the skills shortage – and now, the realisation of a broken business model. The failure of Carillion is a very sad day that brings uncertainty to a lot of people. The industry should look at this as impetus to drive positive change.”

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