Carillion in Liquidation

[MarlowDonkey]

Take an example of a (oversimplified, imaginary) project bringing in £1m per month over 5 years, with a 10% profit margin. At the end of month 1, there's a £100k profit sitting on the projects books, does the company declare that in their financial results?

In total there's £ 60m of revenue, so expecting £ 6 million of eventual profit. What Carillion are suspected of doing, is reporting the whole or most of that £ 6 million in the first month or earlier and making payouts to shareholders and directors on the strength of it. So they have to borrow the cash shortfall. If subsequently they don't get the £ 100k profit, they are left with the debt and nothing to pay it back.

 

[hwl]

The 3% isn't the problem, it's how it is distributed. Like changing the rules to ensure the directors are well looked-after (and remuneration for their "work" and compensation for dismissal increases regardless of company performance) while ignoring the growing gap in the pension fund. The people who lose their pensions are of course the ones who create the money that the directors benefit from (I won't say parasitise...)
Even the spokesperson for the Institute of Directors was having difficulty defending them on the Radio 4 Today programme!

3-5% profit on lots of contracts isn't going to abosrb £100m+ losses each on at least 6 big contracts in recent years (and plenty of losses of less than £100m+ on lots of others). On some of the big problem projects they have probably have a profit margin of -50%.

 

[eastdyke]

.............
The situation at Carillion was even worse as they were running at 3% profit margins and the government apparently generously gave them large up front stage payments as an incentive to lower the price. It is believed cost overruns on only 4 contracts bought them down.

The 4th major (£200m) write-down was at the end of September and related to work in Qatar. I think for which payments had not been received for some time.
Since the 'diplomatic' issues between Qatar and its neighbors became more evident in mid 2017, with air, land and sea blockades in place, the cost of completing contracts in Qatar must have increased considerably.
I am aware of a (completely unrelated) industry in which payments for services rendered to Qatari principals have not been paid for up to one year.
That £200m would have considerably helped cash flow.

 

[lejog]

There's actually been no coverage at all on Carillion's overseas contracts (Middle East/Canada), which seem to be some of the worst-performing.
No doubt that's because no/few UK jobs/government contracts are at stake.
3% is also typically the margin of a rail franchise.
But that 3% gets the left angry for the contractor being a "fat cat", while to the accountants it's insufficient to meet the risks of staying afloat.

There's supposedly a £470m charge for withdrawing from overseas markets and a £200m unpaid bill for World Cup work in Qatar according to the Guardian. The other problem projects are supposed to be the Royal Liverpool University hospital, the £350m Midland Metropolitan hospital and the Aberdeen western peripheral route.

Yes TOCs run on 3% margins, but they are the antithesis of high risk project based companies with highly predictable costs and if revenues don't meet predictions, contracts they can effectively hand in before incurring large losses and going broke. I work at a large IT company, who take on low-risk work with predctable costs such as support contracts at low margins, but never risky bespoke software development projects, that would just be a recipe for going bust.

The 3% isn't the problem, it's how it is distributed. Like changing the rules to ensure the directors are well looked-after (and remuneration for their "work" and compensation for dismissal increases regardless of company performance) while ignoring the growing gap in the pension fund. The people who lose their pensions are of course the ones who create the money that the directors benefit from (I won't say parasitise...)
Even the spokesperson for the Institute of Directors was having difficulty defending them on the Radio 4 Today programme!

Total rubbish, while the behaviour of the the directors may be questionable and rightly is being investigated, Carillion's 2016 Annual Report show total directors remuneration of £3,029,000 or 0.06% of £5.2bn turnover.

 

[DarloRich]

Yes TOCs run on 3% margins, but they are the antithesis of high risk project based companies with highly predictable costs and if revenues don't meet predictions, contracts they can effectively hand in before incurring large losses and going broke.

Agreed - there is no comparison ( and i don't trust the 3% figure either)

Total rubbish, while the behaviour of the the directors may be questionable and rightly is being investigated, Carillion's 2016 Annual Report show total directors remuneration of £3,029,000 or 0.06% of £5.2bn turnover.

Correct as it may be none of that matters - What matters are real people paid a fraction of the directors loosing livelihoods and pensions. The directors seem to be able to walk away from that responsibility.

But that 3% gets the left angry for the contractor being a "fat cat", while to the accountants it's insufficient to meet the risks of staying afloat.

It isnt "the left" unhappy. It is people with a sense of decency, compassion and fair play. Decent, hard working, striving not skiving people have been chucked out of work. I think questioning whether, or not, the directors deserve their comfortable remuneration packages is a fair question when a company fails so spectacularly.

 

[eastdyke]

Certain ideologies seek to portray company directors in a way that belies their appointment.
The principal Directors are not self-appointed they are normally appointed by the shareholders. Carillion Shareholders will have lost their investment.
It is easy to be wise after the fact, perhaps better Directors would have been in place had the remuneration actually been more than it was?

 

[lejog]

In total there's £ 60m of revenue, so expecting £ 6 million of eventual profit. What Carillion are suspected of doing, is reporting the whole or most of that £ 6 million in the first month or earlier and making payouts to shareholders and directors on the strength of it. So they have to borrow the cash shortfall. If subsequently they don't get the £ 100k profit, they are left with the debt and nothing to pay it back.

While I know that is what is being alleged, that would be a process failure that I would have thought auditors should be able to spot a mile off, blatantly taking profit early should be highly visible. I've been interviewed a couple of times by the company auditors and given the third degree about the exact process followed in making decisions about when project profit is taken.

But I'm not an auditor so what do I know.

 

[lejog]

Certain ideologies seek to portray company directors in a way that belies their appointment.
The principal Directors are not self-appointed they are normally appointed by the shareholders. Carillion Shareholders will have lost their investment.
It is easy to be wise after the fact, perhaps better Directors would have been in place had the remuneration actually been more than it was?

Yes the total directors' pay surprised me, I was expecting something in the tens of millions pounds. The main reason why is that they only had two executive directors and a bunch of lowly paid non-execs, which doesn't seem healthy to me. Too much power in too few hands.

 

[strawbrick]

In total there's £ 60m of revenue, so expecting £ 6 million of eventual profit. What Carillion are suspected of doing, is reporting the whole or most of that £ 6 million in the first month or earlier and making payouts to shareholders and directors on the strength of it. So they have to borrow the cash shortfall. If subsequently they don't get the £ 100k profit, they are left with the debt and nothing to pay it back.

There is profit and there is profit.
A lot of contractors will "front end load" the pricing - the bid price of an early item is increased above the "proper" price whilst an item late in the project is reduced below the "proper" price, the totals of the two adjustments are matched such that the overall price of the contract remains much the same. This is done to improve cash flow. When the early work is done, not only are the "proper" profits banked the "excess" are banked as well = bonuses all round! What should happen is that the excess is noted, but not "taken", so that is there to make good the losses on the reduced price items at the end of the job. This only works if you get more work so that the "excess" profits on the later contracts can mask the losses on the earlier ones. Of course, the prudent contractor will not book the profits until they are in the bank, but that does not look good and does not earn bonuses today!
Another area of "profit" is the making and assessment of claims for delays and excess works. The prudent way is work on the basis that all claims bing made will be rejected and that all claims coming in will be paid in full, even if you know that whatever A is claiming against you will be paid for by your claim against B. It is a truly worst case scenario (as in Head Office has caught fire and all the files burnt to cinders, but things can only get better as claims out are settled for more than £0 and claims in are settled for less than claimed! However, as above, it does not look good and bonuses are much later.
I have both tee-shirts.

 

[LNW-GW Joint]

Not to mention the "get well" nature of government contracts.
This means bidding low to win the contract, and then banking on significant add-on business from changes in spec and timescale, at a much higher margin.
Governments can usually be relied on to mismanage the spec (IEP anyone, or GW electrification?) to generate a significant profit from change control.
But just occasionally, a government contract is well-crafted, and the contractor loses out.

 

[fowler9]

Feel free to tell me by PM. I'm sure there are many in CarillionAmey who do a sterling job despite being hamstrung by the cheapness of the contract the MOD awarded.

An old schoolfriend living on a base in the West Country, with his wife and three young children, has been waiting 9 months for a leaking flat roof to be fixed. The leak has left their kitchen all but unusable due to water ingress making electrics dangerous. To say nothing of the mould that has grown.

One 'fix' left them without electricity, and consequently heating, for 2 weeks in November. My friends wife and the children are currently living with her parents over 100 miles away. The eldest two have had to change schools. Before that the children were sharing bedrooms with a neighbouring army family. All thanks to CarillionAmey failing to do what they are supposedly contracted to - maintain properties to a habitable standard.

Mate I really am genuinely sorry to hear that. I am proud to work supporting the armed forces and so are my colleagues, a large number of whom are ex forces and some are married to forces personel and living in service families accommodation. I'd rather not even send a PM at the mo, we have been warned today. Not that I don't trust you just that we have been warned not to comment anywhere on social media etc. We have had the press and all kinds of people trying to get comment not that I think you are one of them. I could even loose my job for commenting.

Apologies, I missed that.

Yes indeed. Let’s hope there’s no contagion within or without the group, and that the financial management of CarrilionAmey was rather better.

I certainly hope the same but as I understand it that is not the case thankfully for us at least.

 

[CarlSilva]

What a load of hot air. Predicting a share price drop is nowhere even close to being responsible for the business failing!

Where does the article say who is responsible for a the business failing?

 

[LNW-GW Joint]

Three months of pay for Carillion employees guaranteed by Network Rail:

Working behind the scenes, the Official Receiver’s special managers – PwC – and Network Rail have come to an agreement which ensures that PwC can pay employees’ wages for work done on and supporting Network Rail’s projects until after Easter and have also made arrangements to ensure rail employees are paid as normal in January for work done in January.https://www.networkrail.co.uk/feeds/carillion-rail-staff-pay-guaranteed-until-mid-april

This should take the immediate heat out of some of the project issues where Carillion are involved.

 

[Elecman]

Pity they never offered that to Jarvis Rail Staff

 

[Abpj17]

Yes the total directors' pay surprised me, I was expecting something in the tens of millions pounds. The main reason why is that they only had two executive directors and a bunch of lowly paid non-execs, which doesn't seem healthy to me. Too much power in too few hands.

Execs are usually full time. Non-execs may have half a dozen jobs sitting on several company boards.

Directors of failing companies are tricky. Carillion was known to be in trouble for a long time. The final set of directors are unlikely to be the ones that got it into trouble - but the ones likely to be trying to save it. Most rats leave sinking ships before they actually sink.
http://www.constructionenquirer.com/2017/11/02/ex-jarvis-chief-joins-carillion-board/ is a potential good example - only joined in November and a turnaround specialist.

 

[Xenophon PCDGS]

My wife and I were visiting the Tameside area yesterday and in the town centre of Ashton-under-Lyne, where the former yellow semi-modernistic Town Hall once stood but was demolished and the elevation remaining of the much older civic buildings and regimental museum which had been retained to be incorporated into the new replacement buildings was strangely silent. Then we saw the Carillion sign affixed to the "portakabin group of work buildings".

 

[Buspilot]

My wife and I were visiting the Tameside area yesterday and in the town centre of Ashton-under-Lyne, where the former yellow semi-modernistic Town Hall once stood "

Ah, Paul, you refer to the former Tameside Council Offices renamed by my son as "the monster sausage tree" forty years ago. Besides Council offices, a public combined service centre/ Job Center Plus and a new Wilko store, part of the new buildings are to house Tameside College, which is to relocate from it's Beaufort Road site, which is then to be redeveloped. There is also a further college building under construction behind the old fire station/The Pump House across the road. I was not at all surprised that Carillion was the main contractor for Tameside Council.
However as it is a local government contract, does it fall under the national government blanket allowing works to continue?

 

[hwl]

Ah, Paul, you refer to the former Tameside Council Offices renamed by my son as "the monster sausage tree" forty years ago. Besides Council offices, a public combined service centre/ Job Center Plus and a new Wilko store, part of the new buildings are to house Tameside College, which is to relocate from it's Beaufort Road site, which is then to be redeveloped. There is also a further college building under construction behind the old fire station/The Pump House across the road. I was not at all surprised that Carillion was the main contractor for Tameside Council.
However as it is a local government contract, does it fall under the national government blanket allowing works to continue?

I think the wording was fairly careful in that it covered service contracts but not necessarily construction contracts which is why NR's announcement was more significant than Nationwide etc. which were only service contracts but the press didn't really pick up on the significance of the NR press release.
All the Hospitals are still paused for example but the JV sites haven't yet.

 

[Olaf]

Well the contractors/suppliers I would hope, get paid direct by the banks/government rather than the middleman.

Contracts would be with the Carillion - but I think this is old news now.

However it should serve as a reminder to contractors to pay attention to the financial health of businesses before they sign-up to provide services/product and to take action as necessary with contracts that fall behind on invoice settlement.

 

[HSTEd]

One problem is with corporate pay being as high as it is, it creates a perverse incentive for directors to try and keep the show on the road till the last possible moment, which leaves the creditors with nothing as they continue until all their assets are gone, even though the people in charge should know the game is up.

An extra week's pay when you are on several million a year is a lot of money.

 

[Olaf]

Sorting this mess out will be very complicated and will have severe political implications.

.

It can take, typically, between 18 months and three years to complete the wind-down.

 

[Olaf]

...
On top of that is Network Rail's cut back of projects, which in itself must have reduced the pipeline of new work for Carillion and other contractors.
...

That is a perternant point - keep your eyes peeled for future developments on that topic.

 

[Bromley boy]

One problem is with corporate pay being as high as it is, it creates a perverse incentive for directors to try and keep the show on the road till the last possible moment, which leaves the creditors with nothing as they continue until all their assets are gone, even though the people in charge should know the game is up.

An extra week's pay when you are on several million a year is a lot of money.

Directors have to walk a bit of a tight rope between trying to keep the business going through a difficult period, but at the same time not straying into wrongful or fraudulent trading.

If directors deliberately continued to trade knowing the business was insolvent they could wind up being personally liable for the company’s debts or even with a prison sentence.

 

[Olaf]

Going back to the JVs; The members of these JVs will normally provide specific competencies as illustrated in the table in this item regarding Network Framework Contracts:

http://www.railtechnologymagazine.com/Inbox/network-rail-awards-16bn-in-framework-contracts/84321
- 2014-09-04

It is therefore not a straight forward task for JV partners to pick-up where a member has failed. It is not impossible to resolve, but nor will it happen over-night. I suspect that the JVs that Carillion was involved will start (if they have not already done so) to be flagged for missed milestones.

 

[Xenophon PCDGS]

If directors deliberately continued to trade knowing the business was insolvent they could wind up being personally liable for the company’s debts or even with a prison sentence.

A point very well made indeed.

 

[Mike 1050]

A point very well made indeed.

Where do you get that idea from ?
The company would be a limited company therefore directors are limited in their liabilities. Plus the company owes nearly a billion pounds even if you could take the shirts off their backs it wouldn’t be a drop in that ocean . Also the directors would of put their wealth off shore lung before the company collapsed therefore it’s pretty much untouchable

 

[Bromley boy]

Where do you get that idea from ?
The company would be a limited company therefore directors are limited in their liabilities. Plus the company owes nearly a billion pounds even if you could take the shirts off their backs it wouldn’t be a drop in that ocean . Also the directors would of put their wealth off shore lung before the company collapsed therefore it’s pretty much untouchable

This post simply reveals that you don’t understand the concept of limited liability. The liability in question is that of the investors in the company (ie shareholders). The directors* are not investors and are paid by the company to perform a role.

This point was discussed extensively upthread.

*of course many directors themselves own substantial shareholdings in the companies they direct. This is irrelevant to the duties they owe to the company in their capacity as directors.

 

[Bookd]

The shareholders (including directors if they were also shareholders) will have lost the lot.
This is often overlooked when people talk of bank bailouts - the owners of the banks (the shareholders) lost most or all of their money. It was the system that was bailed out, not the owners.

 

[nidave]

The issue comes with any insider trading which is illegal. The directors know the true state of the company before other shareholders and sell thier shares before they tank. That is illegal.

 

[Bromley boy]

The issue comes with any insider trading which is illegal. The directors know the true state of the company before other shareholders and sell thier shares before they tank. That is illegal.

I’m struggling to understand whether this is a statement or a question. If it’s the former, do you have any evidence to back it up?

If not, should you be making such an accusation on a public Internet forum?!