Carillion’s collapse into liquidation on Monday means developers will have to reassess the viability of commercial developments around the country.
The downfall of one of the UK’s largest contractors is expected to have widespread ramifications, as knock-on effects to subcontractors could cause delays and additional costs to hundreds of developments.
Subcontractors, which face a standard payment term from Carillion of 120 days, will not be paid for outstanding invoices.
Developers with projects currently under construction by Carillion will have to decide whether to enter into direct arrangements with subcontractors to ensure the continued delivery of a scheme, or appoint alternative construction managers.
Developers without direct exposure to Carillion face the potential threat of subcontractors overly reliant on the firm going bust.
The government has agreed to pay the salaries of Carillion workers, subcontractors and suppliers on the collapsed firm’s 450 public sector projects, which include the building and maintenance of prisons, hospitals, Ministry of Defence sites and HS2.
Pressing risks
Equivalent support has not been offered to protect Carillion’s commercial contracts.
“Contracts are not going to be delivered by Carillion and so additional funding and resources will need to be found to complete these by other means, if at all,” said Mark Fletcher, senior associate in Russell-Cooke’s commercial litigation team.
“Carillion’s suppliers and subcontractors face an even more pressing risk, as they now have immediate pressures on their cash flow because outstanding invoices are not going to be paid.”
Subcontractor McMullen Facades, which is working for Carillion on the Google building in King’s Cross, N1, told Construction News on Monday that its site was “still operational”.
The company’s commercial director, Colin Lewis, added: “I’ve been informed by the directors on that job that they’ll have more information later today and they’ll let us know.”
Argent declined to comment on any impact of Carillion’s collapse on outstanding developments at King’s Cross.
However, a spokesman said the developer was confident its £700m Paradise project in Birmingham, where Carillion was delivering eight-storey office building One Chamberlain Square, would not be “adversely affected”.
“Our strong relationships with the supply chain and main contractors, along with a robust contingency strategy, means that we are confident that One Chamberlain Square will not be adversely affected,” the spokesman said.
“The site-wide works are now over 80% complete and BAM will be on site in February starting construction of Two Chamberlain Square as programmed.”
Contingency planning
Mark Farmer, chief executive of construction consultancy CAST, said he expected many developers will not have been prepared for the news of Carillion’s liquidation, which was being talked about up until Sunday as a potential administration.
“The main difference [between an administration and a liquidation] is an administration will continue to run the business and all existing contracts don’t dissolve. In a liquidation it’s all much more finite, so the employment of a contractor will finish, so it’s really about clearing up the mess.
“Even last night, everyone was talking about administration, and that is going to cause more problems around the continuity aspects and contingency planning.”
Developers with ongoing projects on which Carillion was working will have to work out where they are in terms of progress, what needs to be done around completing materials payments and securing those materials from offsite factories, Farmer added.
It will not be possible to reassign existing Carillion contracts, so a new package for the completion of a project will have to be drawn up.
However, Farmer said there may not be a huge amount of appetite from rival contractors to take on Carillion’s abandoned projects – and those that do will charge more.
“Some will be quite complicated and difficult to step into,” he said.
“Certain contractors will see it as being too much trouble, depending on their own workload. I can pretty much guarantee you that the price they charge for doing that work is going to be more expensive.”
Infrastructure delays
Carillion began scaling back its commercial property interests during the second half of last year, following a strategic review of its finances by EY.
In November, it sold its two-thirds share in Manchester-based developer Ask Real Estate to the Midlands-based Richardson family for £13.8m.
In December, it sold its joint venture share in Arlington Real Estate, and the Richardson family’s £150m Milburngate development in Durham as the project approached its first stage of construction.
Carillion is a joint venture partner with Manchester Airports Group, Beijing Construction Engineering Group and the Greater Manchester Pension Fund at Airport City Manchester, an £800m mixed-use regeneration project.
However, Lynda Shillaw, chief executive of MAG Property and director of the Airport City joint venture, said the current construction at the airport was being undertaken by BCEG and was “not affected” by the issues at Carillion.
The development community could also be impacted by delays to Carillion’s infrastructure projects, which range from HS2 to the Aberdeen Bypass.
The firm was also named preferred bidder for the East Leeds Orbital Road.
Iain Thomson, associate director at Harworth, which has never directly employed Carillion as a contractor, said: “We’re aware that Carillion is principal contractor for a number of public infrastructure programmes, which in turn will unlock residential and commercial development.
“In order to minimise disruption, the official receiver will need to give swift, clear direction to the public bodies that commissioned their services in order for this work to swiftly resume.”
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