What happened?
Carillion was a major UK construction and facilities-management company with contracts ranging from roads and hospitals to public services. In January 2018, the company entered compulsory liquidation.
The House of Commons Business, Energy and Industrial Strategy Committee and Work and Pensions Committee conducted a joint inquiry into Carillion’s management and governance, its pension schemes, and the external checks around the company. Their report, published on May 16, 2018, records that Carillion entered liquidation with nearly £7 billion in liabilities and just £29 million in cash.
Four months after publishing its 2016 accounts in March 2017, Carillion announced an £845 million reduction in contract values. By September the write-down had reached £1.045 billion — the same amount as the company’s previous seven years of profits combined.
This article focuses less on the collapse timeline than on the concrete decisions and records left behind in board discussions, contract appraisals, supplier-payment terms, pension negotiations, audit and regulation.
12 passages that stood out
The 105-page report contains details that are easy to lose in a summary of a corporate collapse: two sharply different margins for the same hospital contract, 120-day standard supplier terms, a bonus for a CEO who met none of his financial targets, and a board response to a broker that declined to underwrite an equity raise.
The source is the original English-language House of Commons report. Page references use the printed page numbers in that report.
One month before the £845 million write-down, Carillion paid a £55 million dividend
Carillion suspended dividends in the July 2017 profit warning. In January and February that year, the board had debated whether the dividend should go ahead.
January 2017 board minutes show then Finance Director Zafar Khan proposing that the dividend be withheld to conserve cash and reduce debt. Audit Committee Chair Andrew Dougal and Senior Independent Non-Executive Director Keith Cochrane opposed that course because of the signal it might send to the market.
The £55 million final dividend was ultimately paid about one month before Carillion announced the £845 million reduction in contract values.
The pension trustees asked for £65 million a year. Carillion offered £33.4 million on a “take it or leave it” basis
During the 2011 pension valuation, the trustees calculated a £770 million deficit and sought annual deficit-recovery payments of £65 million for 14 years. Carillion used more optimistic assumptions, calculated the deficit at £620 million and proposed £33.4 million a year for 15 years.
Independent covenant adviser Gazelle Corporate Finance told the trustees that Carillion could increase annual contributions above £64 million without a significant impact on available cash flow.
The report describes Carillion’s £33.4 million proposal as a “take it or leave it” offer.
Trustee Chair Robin Ellison also said that Finance Director Richard Adam viewed pension-scheme funding as a “waste of money.” That is presented as Ellison’s account of Adam’s attitude.
Standard supplier terms were 120 days. Getting paid after 45 days meant selling the invoice to Carillion's bank at a discount
Carillion was a signatory to the Government’s Prompt Payment Code. After joining the Supply Chain Finance Scheme, however, it changed its standard supplier-payment terms to 120 days. A footnote specifies that Carillion was still expected to pay within 30 days on its public-sector contracts.
Suppliers could sell invoices to Carillion’s bank at a discount and receive money after 45 days, while Carillion did not have to reimburse the bank until the 120-day term expired.
At the time of the collapse, Carillion had access to as much as £500 million through this early-payment facility and had drawn about £350 million.
The committees concluded that the arrangement functioned as a source of credit for Carillion and helped shore up its fragile balance sheet.
The chairman interpreted his role as being an “unquestioning optimist,” the committees said
Philip Green was Carillion’s chairman from 2014 until liquidation.
The report says Green accepted “full and complete” responsibility for the collapse as chairman, while not necessarily accepting culpability or saying who was culpable.
The committees said Green interpreted his role as being an “unquestioning optimist.”
Their criticism was that a chairman was expected to challenge management and test its judgments, rather than maintain that outlook.
The CEO met none of his financial targets and still received a £245,000 bonus. The clawback terms could not recover it after the £845 million write-down
In 2016, Chief Executive Richard Howson received a £245,000 bonus, equal to 37% of his salary.
According to the report, Howson received that bonus despite meeting none of his financial performance targets.
Carillion’s clawback policy was limited to circumstances such as a restatement of accounts or gross misconduct. In September 2017, the remuneration committee considered asking directors to return their 2016 bonuses, but concluded that this could not be enforced and would be very difficult to achieve.
The committees criticised the original terms as so narrow that they ruled out even a penny being recovered when the failures behind the £845 million write-down emerged.
A hospital contract showed a 12.7% loss in peer review, while management used a 4.9% profit margin
Carillion used peer reviews to challenge contract margins reported through management contract appraisals.
When Deloitte later examined peer reviews for contracts that contributed to the £845 million provision, it found that management appraisals often used higher margins than the peer reviews.
For the Royal Liverpool University Hospital contract, a November 2016 peer review suggested a 12.7% loss, while the management contract appraisal used a 4.9% profit margin.
A footnote specifies that the difference between the November assessments was £53.9 million. The year-end position recorded in the 2016 financial statements used a 4.44% profit margin, equating to £52.5 million more revenue than under the peer-review estimate.
The £53 million provision against the hospital contract formed part of the initial proposal presented to the board on July 7, 2017. The report’s footnote says that, as the overall provision increased from £695 million to £845 million by July 9, the hospital provision also increased by £15 million.
Carillion recognised £294 million of client-unapproved construction revenue — more than 10% of construction-contract revenue — without disclosing the amount in the financial statements
Carillion used the term “traded not certified” for construction revenue that clients had not yet signed off, such as claims and variations. The report notes that payment was therefore inherently uncertain.
By December 2016, Carillion was recognising £294 million of traded-not-certified revenue, more than 10% of total construction-contract revenue.
The figure appeared in papers reviewed quarterly by the audit committee, but the amount was not publicly disclosed in the financial statements.
£472 million drawn through the early-payment facility stayed outside total debt, and bank borrowing could appear as operating cash flow
Moody’s and Standard & Poor’s argued after the collapse that Carillion’s accounting for its Early Payment Facility (EPF) concealed financial borrowing by presenting the amounts as liabilities to “other creditors” rather than “borrowing.” Carillion audit-committee papers showed £472 million actually drawn under the facility.
The Financial Reporting Council did not confirm whether it agreed with that assessment, noting that the exact terms of a supply-chain financing arrangement determine the correct accounting treatment.
Under Carillion’s classification, the £472 million sat outside total debt, and the cash-flow statement could present bank borrowing as an operating cash inflow.
The committees said Carillion would most likely have breached a key lending covenant much earlier if the £472 million had been treated as debt. Moody’s recalculation also suggested that moving EPF inflows to financing activities would reduce reported cash conversion over 2013–2016 from above 100% to 7%.
KPMG audited Carillion for 19 years and received £29 million in audit fees. It never issued a qualified audit opinion
KPMG audited Carillion throughout the company’s 19-year existence from 1999.
Across that period KPMG charged £29 million in audit fees, in addition to fees for tax and other assurance work. KPMG told the committees that the length of the relationship had not impaired its independence.
In those 19 years, KPMG never found reason to issue a qualified audit opinion on Carillion’s financial statements.
The committees sharply criticised KPMG’s professional scepticism and its challenge of management judgments around issues such as contract revenue and goodwill. Those conclusions are the committees’ assessment.
Three days before liquidation, Carillion paid advisers about £6.4 million. The next day it made its final request for Government support
On January 12, 2018, Carillion paid a total of £6,396,141 to law firms, accountants and financial advisers.
The payments included £2.508 million to EY, about £1.196 million to Slaughter and May and about £1.019 million to FTI Consulting.
The following day, Carillion made a final request to the Government for guarantees of up to £160 million between January and April 2018, including £10 million immediately.
The Government told the company on January 14 that it would not provide the requested support. Carillion entered compulsory liquidation on January 15.
Morgan Stanley declined to underwrite an equity raise. The board called its position “not credible,” and then sought its advice less often
In July 2017, Carillion was considering a possible equity raise. Morgan Stanley told the board that it would not underwrite the proposal because senior management had not produced an investment case likely to win support from existing or new shareholders.
After Morgan Stanley’s representatives left the meeting, the board concluded that the broker’s position was “not credible.”
HSBC was later appointed as joint corporate broker. Morgan Stanley told the committees that Carillion sought its advice less frequently after that point.
The Pensions Regulator referred to its enforcement power seven times, but had not used that power once in 13 years
The Pensions Regulator (TPR) had power under section 231 of the Pensions Act 2004 to impose a schedule of pension contributions.
The report says TPR referred to that power on seven occasions between June 2013 and March 2014 during the Carillion negotiations, but had not used it once in 13 years for any of the thousands of schemes it regulated.
The joint committees said Carillion correctly interpreted those references as “empty threats” and criticised the regulator’s reluctance to use the power.
What the report says about the background
The joint committees did not explain Carillion’s collapse as the result of one contract or one isolated decision. They connected board-level financial and business choices with contract accounting, the priority given to dividends over pension funding, supplier-finance arrangements, and weaknesses in management challenge.
The report also examined checks outside the boardroom, including external audit, internal audit, investors, pension regulation and financial-reporting oversight. Some of the report’s language about those actors is strongly evaluative; this article therefore keeps documented figures and events separate from the committees’ own findings and criticism.
The report also makes clear that the committees did not investigate the merits of individual Government decisions to award contracts to Carillion; those matters were being considered elsewhere.
Corrections to this article
Distinguished the November 2016 hospital appraisal’s 4.9% margin from the year-end 4.44% margin and £52.5 million revenue difference. The £53 million provision was the July 7 initial proposal, increased by £15 million by July 9. Clarified that the final Government request sought guarantees of up to £160 million, added source pages for the payment arrangement and liquidation chronology, clarified January–February dividend discussions and the 30-day expectation for public-sector contracts, and labeled witness accounts separately. Japanese borrowing, claims and misconduct wording was also corrected.