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Carillion, A Game Of Liars Poker

Carillion, a Game of Liars Poker

Quality, Consequences and the Construction Industrial Complex (part 137).

There are more Carillion’s out there. Why? Because a modern construction firm is a game of liars poker, a cash flow Ponzi scheme. Harsh words and many will not agree, but this is all IMHO.

In 2018, a construction firm that builds skyscrapers and key infrastructure such as hospitals, is not really a construction firm it is a management firm playing a game of cash flow “musical chairs”. When the music stops i.e. the money, there is never enough to go round.

Ask yourself this, how many bricklayers, electricians, plumbers, plasterers, etc. does Turner, Skanska, PCL et al employ directly? The answer is zero. The truth about Carillion and others is, they have evolved into “virtual” companies with few fixed assets. Their value is based on their ability to use accounting voodoo to self value multiple contracts in their accounts,  maintain positive cash flow, pay shareholder dividends on time and pay suppliers and sub-contractors late i.e. 120 days is an average.

For the Carillon’s, the evolution of P3 (PFI) was a game changer. They went from “construction” firms to outsourcing monopolies and asset managers with tangible, cash flowing contracts on their books. Their new business model was to extract value from the public sector, sub-contract all the work and “make the spread”.

One of the key P3 (PFI) requirements is a vertically integrated design and delivery firm or consortium. The reality is that the Carillion’s do not really vertically integrate, instead they used their standard business model of horizontal supply chain and professional services team management. It is the usual “Hunger Games” play.

I have worked on several large PFI (P3) projects and none of the construction phases completed within budget. The thought was that the money will be made in running the asset or selling it on. However, the risks and projects were so large that the management, design and delivery expertise was not really there and over the long term, there are consequences for all involved.

When the game was up for Carillion, the liabilities included:

  • Underfunded pension liabilities to the tune of £500m
  • Massive debts due to loans taken on to play the PFI game and pay dividends
  • Massive accounts payable to suppliers and sub-contractors, some of whom will go bust
  • High levels of “goodwill” write downs related to past acquisitions

Carillion have stated that a handful of “onerous contracts” took them down. I do not agree, IMHO, it was bad management, poor execution on site and a weak balance sheet.

Companies like Carillion are products of a business culture of high debt driven by a historic low borrowing costs. However, in a world of rising interest rates, I predict more Carillion’s going bust. This will require interventions from debt laden governments to keep key infrastructure operational and bail out pension funds, all at the tax payers expense. The end game generally looks like this: 

  • Share holders require yearly improvement in EPS, profits and company valuation.
  • Dividends cannot be stopped or reduced as this signals trouble and suppliers demand prompt payments.
  • Accounting voodoo, engineers good will and on going contracts re-valuations.
  • Additional debt is taken on to keep the cash flow game rolling and pay dividends.
  • Low profit margin projects are taken on to keep the cash flow game rolling.
  • Moral hazard manifests as there is a belief by the board that governments will not let infrastructure projects i.e hospitals, close.
  • Interest rates rise  and / or cash flow turns visibly negative and the game is up!
  • Employees, shareholders, tax payers, suppliers and sub-contractors all pay the price.

There has to be a better way to procure and deliver large construction projects with win, win outcomes for all involved? The UK Heathrow terminal 5 project might be an example?

Anyways, think about this, if you are a supplier or sub-contractor with a firm like Carillion and have accounts due over 30 days you are providing interest free financing to your client and run the risk of losing a lot of money when the cash flow game stops. Seller beware!

Twitter: @BLDWhisperer

Related posts & links:

#61 – Too Big To Succeed ( )

#54 – P3, unicorns and rainbows – the 2 biggest issues ( )

#105 – Bad Projects? No, Only Bad Leadership (

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