A tale of two very different collapses: what Carillion (still) and Jerram Falkus tell us

On the face of it, the collapse of a 140-year-old building contractor and the news Carillion signed up for a job with a 0% profit margin would not appear to have too much in common.

The former seemed to be an act of rank stupidity and the latter seemed to be a victim of the rather well-worn phrase of late, that being the “wider challenges facing the construction industry”.

Did Carillion mean to go bust? No. Did Jerram Falkus mean to go bust? No. The two events might be more than 12 years apart but many other well known contracting names have gone under in between. There is a theme here: contractors go bust with alarming regularity.

Both Carillion and Jerram Falkus had long histories. Carillion’s is better known, given it used to be known as Tarmac before its name change at the turn of this century. 

Jerram Falkus was begun in 1884 by James Jerram before his son Herbert took it over in 1919. Its roll call of jobs include constructing the ventilation buildings for the Blackwall Tunnel, which opened in 1967, with Jerram Construction becoming Jerram Falkus after buying Falkus Construction, which was set up in 1919, in 1980.

Jerram Falkus called in administrators the day it emerged Carillion signed up for a 0% profit margin on the first phase of Battersea Power Station redevelopment

Among its more recent jobs were several Building Schools for Future schemes as well a job for the Natural History Museum. 

Jerram Falkus called in administrators on the day it emerged that Carillion signed up for a 0% profit margin on the first phase of Battersea Power Station redevelopment, which has provoked an interesting response online.

Some seem to think that by bidding a job at 0%, a contractor, in this case Carillion, can’t really have been expecting to make absolutely no money on the job. Some firms are daft but that daft? Come on!

They would have been pricing in other ways to make money, this argument runs, with some cynics no doubt concluding this would have involved squeezing the supply chain.

Contractors often chase turnover because the cashflow can be used to generate income. But it’s a high-risk strategy

Contractors often chase turnover because the cashflow can be used to generate income. But it’s a high-risk strategy because two or three bad jobs going on at the same time drains a firm of cash. And without cash, any firm is dead.

Some reckon that money can be made through efficiencies, but where though? The skinniness of the margins don’t allow it. And isn’t creating efficiencies on a 0% margin dwarfed by risk? Most would suggest that doing jobs at 0% is about one of two things: doing it as a loss-leader, a way to get in the door for more lucrative work coming down the track; or to accelerate cashflow.

It all seems to be the economics of the madhouse and would appear to be a fiendishly complicated way for contractors to make money: sign up for a job, pretend not to make money on it and then try and make money through other ways. Is it really worth it? Just be honest, set a margin budget and go from there.

The 0% figure emerged in a report the financial regulator, the Financial Conduct Authority, published on Carillion’s former chief executive Richard Howson. He was fined for the role he played in the company issuing a series of misleading statements in 2016 and 2017.

It zeroed in on four problem jobs that dogged the company for years and helped cause the financial black hole which led to its liquidation eight years ago.

Its scheme at Battersea Power Station, to build more than 850 flats, was hit by utility delays and client variations; on its Midland Met scheme, a new hospital it was building at Sandwell, it was hit by heavy rainfall “flooding parts of the building” and “problems with the design and procurement processes arising from a short bid period”; on a scheme to build a ring road around Aberdeen it was “significantly delayed [in 2015 and 2016] by poor weather and delays in diverting statutory utilities”; a scheme to build a new hospital in Liverpool, due to finish by spring 2017, suffered from unnamed “significant delays” in 2015 and 2016.

All of these sound as familiar now as they did then, although the proliferation of pre construction services agreements (PCSAs) are, in part, intended to ensure costs are finalised, designs are nailed down and that when they are converted into contract awards no unforeseen circumstances crop up. That’s the theory, at least.

Carillion’s collapse was a self-inflicted outlier for pretty much everyone in the industry but the issues it faced were far from one-offs: client behaviours, bad weather, utility delays – just a few of the issues contractors face and which are beyond their control. All can combine horribly to produce catastrophic results.

An administrator’s report into the collapse of Jerram Falkus has yet to be written but it should appear in the next few weeks.

It’s a fair bet the sort of problems that have befallen others over the years will, again, crop up here. The company, which has seen all that history disappear, gave an idea of what it has been up against in its last set of full-year results it filed at Companies House.

“The construction industry has been through an unprecedented inflationary period,” it said in its results for the year to July 2024 which were published in December that year.

“Increases to interest rates has reduced the ability of sales values within the residential markets to offset the inflationary cost increases. This results in projects either not going forward or having delayed starts.”

But it remained confident that it could avoid a reckoning. “Our diverse experience and market should help to manage this risk as other sectors are more able to adjust their scope to be within budget.”

The administrator’s report will reveal the exact reasons Jerram Falkus hit problems.

Some firms are just caught out by a job that goes wrong at a price that was wrong in the first place. Some just ran out of cash. But what other industries put companies at huge risk for a 3% margin – if you’re lucky?

Firms should go bust because they are incompetent, badly run and do a terrible job. But not every firm goes bust because of that. Some succumb because it really does feel like the odds are stacked against them.

Those firms with good balance sheets – Morgan Sindall, Galliford Try and Balfour Beatty stand out among the listed contractors – seem better set to withstand the headwinds.

Last year, Building carried an interview with Pete Duff, the chief financial officer of Osborne brought in by the late Dave Smith to try and help save that historic marque.

Its collapse in April 2024 drew a line under a brand that had, for better or worse, always been seen as an old-fashioned, gentleman contractor. It sank at the end of a period, which lasted perhaps eight or nine months, that saw Henry Construction, Buckingham and MJ Lonsdale all go in that time. ISG was a few months away from its own implosion.

Duff, who has since set up a financial advisory business called Stylus Partners, says the business was not yet on the brink when he joined. “It was absolutely salvageable. I wouldn’t have joined otherwise.”

So what went wrong? “What did for Osborne was the size of the losses on two or three jobs. The size of the organisation was only capable of absorbing a certain amount.”

The collateral damage of losses also has other impacts. Clients get nervous, pipelines of work dry up, cash gets reduced further as a result and that makes lenders and the supply chain nervous.

There are common themes here. Are bidding jobs at 0% profit margin one of them, then?

This is what the chief executive of a major contractor said when asked would their business ever, under any circumstance, bid a job at 0%? “What do you think?” came the reply. “We aspire to be resilient and stay in business.”

Whichever way you cut it, pricing a job at 0% is not a way to stay in business. But here’s the thing: how on earth is this allowed to happen, why does this industry, especially, think that this might be remotely a good idea? It says something is structurally wrong here. Unfortunately, it’s nothing new because this is the message that’s been said for a quite a few years now.