Raffuel Surety Group

Carillion Collapse Forces Insolvency on Main Street

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While the dust may be settling, the aftermath intensifies. With the first anniversary of Carillion collapsing now in our rearview, it may be time to reflect on lessons from history. I believe it was Teddy Roosevelt who said “those who don’t learn from the past are doomed to repeat it”. Remember Enron? Of course you do. A corporate giant whose fall from the top reverberated for years beyond its thud. Replete with greed, negligence, rogue accounting and an absence of adequate oversight. Sound familiar? But here’s the difference – the Enron collapse triggered one of the largest commercial surety losses on record. The public was forced to absorb Carillion’s burden.

In what’s to follow, we examine performance exposure and how surety may have not only helped prevent Carillion from imminent insolvency, but why an overhaul of the performance security, surety bond, platform throughout the UK, EU and beyond is long overdue.


Who was Carillion? What happened?

Since 1999, Carillion had grown to become one of the largest publicly traded, multinational construction and facilities management corporations in the world annually producing £4-5BLN in revenues since 2011. The UK’s second largest, chasing first place through aggressive contract bidding and acquisition strategy designed to fuel rapid growth.

Their ambitious climb to first was soon reached albeit in an undesired category.

As stated by UK Official Receiver Dave Chapman, Carillion has achieved top ranking for “the largest ever trading liquidation in the UK.”

Their growth strategy as it turns out was short sighted and instead focused on pushing up stock price via artificial means, eventually leading to its implosion.

As a result, Carillion’s liquidation as we currently know resulted in:

  • 2,000 lost jobs
  • £2.6 BLN in unpaid pension liability
  • £2.0 BLN owed to 30,000 suppliers, sub-contractors and creditors
  • £150,000,000 public funding bailout

Carillion liquidated in January 2018 with liabilities equating to approximately £7 billion and a mere £29 million in cash reserves.



How did this happen?

A combination of an unsustainable growth strategy, corporate misconduct, an absence of internal controls and external accountability, lax regulation, misguided government and mismanaged contracts.

Let’s take a look under the hood.

Unsustainable Growth Strategy

Carillion’s ambitions to grow were admirable. They wouldn’t be the first to fuel growth through a merger & acquisition plan of strategic and complementary assets. The leveraging of economies of scale, taking on complementary verticals and entering new markets can be achieved at paying reasonable premium to market for well performing assets. Carillion, however, drastically overpaid for poorly performing assets and absorbed crippling deficiencies. In fact they paid over £1.3 billion for “assets” whose total worth was recorded as “goodwill”

Ever try to pay bills with “goodwill”??

  • 2006 – Mowlem was acquired for £350 million in an attempt to create one of the biggest service support operators in the UK, gaining government contracts, P3 projects, office infrastructure and improving its supply chain. What they also absorbed were accumulating pension scheme deficits. Carillion recorded 431MM goodwill on this transaction.
  • 2008 – Alfred McAlpine was acquired for £565 million with only 6 weeks of due diligence and after a Mowlem deal where numerous problems surfaced. Along with a £4 billion order book, Carillon again absorbed deficiencies. They recorded 615MM goodwill.
  • 2011 – A struggling Eaga was acquired for £306 million to capitalize on a ‘new strategic era of growth’ in building the largest independent energy services provider in the UK. Profitable pre-acquisition only to be followed by £260 million in accumulated losses. £329MM of goodwill was recorded.

Primarily financed with debt, all three acquisitions were purchased for more than their tangible net asset value. Instead the ‘worth’ was attributed to goodwill which ballooned up to £1.6 billion by 2016 or approximately 35% of Carillion’s total assets.

Corporate Misconduct

The DNA of Carillion’s board of directors promoted behavior which benefited short term stock price, directly aligned with executive performance compensation. The long-term sustainability of Carillion, a vital component to the UK’s infrastructure and economy, it seems didn’t make the meeting minutes.

  • Chair of the Audit Committee rejected proposals to withhold cash to pay down surmounting debt, placing priority to dividend payments rather than debt reduction. A record £79 million dividend was paid on June 10th, 2017 just prior to the July 10th profit warning and September announcement writing down £1.04 billion, wiping away seven years of previous profits.
  • While directors were shareholders, not all were members of the pension scheme, instead participating in a separate contribution scheme. Performance indicators for it did not include risk management of the pension plan thus the refusal to make significant enough contributions resulting in underfunding into the billions.
  • The board failed to question and hold one another accountable, ignoring the warning signs brought to their attention. Instead, the culture promoted finance teams to use ‘aggressive’ accounting policies and tactics, manipulating revenues to appear healthy and promising for the future.

Rogue Accounting and External Accountability

Generally, the public tends to believe it is protected from corporate misconduct by government regulatory authorities and through mandated audits of publicly traded companies. This check and balance system only works if accountability is upheld and standards are enforced. The lines were blurred with Carillion.

  • Deloitte was engaged as Carillion’s internal advisory and auditor collecting over £1 million in fees. They were tasked with ensuring the organization’s risk management, governance and internal control processes were intact. Over 4 years, only 15 of 309 recommendations were considered high priority.
  • KPMG was Carillion’s external auditor paid £29 million over 19 years. Throughout the relationship, KPMG never qualified an audit opinion and signed off on inflated revenue figures. It was found that insufficient testing was performed on certain audits and rarely were management’s assumptions challenged. Carillion’s aggressive accounting approach was never questioned. KPMG was aware of the growing risk in contract revenue recognition and goodwill propping up the balance sheet.

Carillion used questionable accounting measures to artificially inflate revenue by recognizing much of it upfront, contrary to generally accepted accounting principles. Proper accounting requires the revenue to be “earned”, not just billed.

Minimal oversight, lack of accountability or enforcement, misaligned intentions and the list goes on.


Would greater performance requirements and MEANINGFUL surety involvement have prevented this bad situation from becoming worse?



Great question, but before we get to that, some history…..


A surety bond, like a bank guarantee, is a form of performance security. A surety bond guarantees the fulfillment of the obligations within a contract, where the surety company assumes liability for nonperformance in the event of default. Simply, the bond provider (aka surety) ‘co-signs’ the performance obligation of the contract.

It protects the private or public owner from those they contract with from defaulting on completing their obligations. In this case, the prime example is the UK government as owner contracting with Carillion to perform construction obligations.

It is first important to set the stage for what represents “normal” performance security mandates outside of North America. The vast majority of the world maintains percentage requirements for performance security, or partial bonds. Typically, this runs 5-10% of the contract value. Rarely, it may reach as high as 20%. These obligations, whether secured via bank guarantees or surety bonds, are “on demand” instruments. Meaning the beneficiary can draw against the guarantee without declaring a formal default, and for almost any reason they choose.


Why this is bad. Very bad.

Modern history dates surety back to 1837 in North America, and for those of us used to operating under the surety system in the US, we know through experience that 5-10% is insufficient to solve a problem. The loss ratio on surety claims approaches 40% of the backlog at the time of default or insolvency.

So, why and who determined that a performance guarantee level of 5-10% was sufficient elsewhere?

The implementation and regulation of banking practices and regulations evolved as one of the most critical infrastructure elements of the modern world. No one in the surety industry would ever suggest we are on par in the big picture scheme of things.

Performance guarantee requirements similarly evolved well before the invention of insurance backed surety. Thus, it became the domain of the banking world, where much of it still exists globally. However, surety is typically an unsecured credit extension, while banking is not. Credit limitation regulations simply do not make it possible for the banking community to provide more. Nor is it possible for the client to put aside equivalent assets to backstop bank guarantees at more appropriate levels, say 50%. It’s just too rich.

We must, at this time, point out that where limited percentage performance guarantees exist, payment guarantees do not generally follow. So, think about this; a $100 million project, with 10% performance security, goes into default. That $10 million must cover cost overruns (because the project was likely underpriced in the first place), defective workmanship and, if anything remains, unpaid vendors to the project. Not much to spread around.

Mismanaged Contracts

Carillion became accustomed to buying new markets in the form of strategic company acquisitions. This strategy was not sustainable considering the deficiencies they inherited alongside its ballooning debt. With a depleted balance sheet and difficulties in the UK construction market, their strategy shifted to aggressively bidding work in unfamiliar markets where they had little experience. The mere size of Carillion and name brand recognition provided the advantage to win work. This was the easy part, managing them to profitability was the problem.

  • 2011 Msheireb Properties (Quatar) – A mixed use development project with completion slated for 2014 remains unfinished. The owner made a claim against Carillion for £200MM. Internal reports cited Carillion’s weak supply chain, poor planning and failure to understand design requirements as well as difficulty in adapting to local business practices. Msheireb further claims that payments were continuously being made despite project delays, but Carillion failed to pass these on to over 40 subcontractors, forcing them to pay subs direct to ensure project continuation.
  • Midland Metropolitan Hospital (UK) – Once privately funded, the cost of completion grew to £525 million from the estimated £350 million after Carillion collapsed. A new contractor is being appointed in early 2019 responsible for full design and construction risk with taxpayers footing additional completion costs.
  • Royal Liverpool University Hospital (UK)– Cost of completion grew once discovered remedial work was required to correct faults of Carillion to rectify cladding problems. While still under construction with Carillion, the £253 million, 5-year project increased by £20 million upon the discovery of cracked beams putting cost to complete at an estimated loss of 12.7%. Still management disagreed and recorded a profit margin of 4.9%.

Carillion continued to bid 13 contracts in the Mideast within a 4-year span. A 2017 audit committee discovered 18 contracts were suffering losses. Carillion’s solution had the makings of a Ponzi scheme, using the front loading of revenues on new work brought in to mask complications.

A ‘hands on’ surety relationship mandated by meaningful bonding limits would have advised against such aggressive tactics and very likely refused to provide its essential support. Or recommended required local joint venture partners familiar with the terrain, and who could put a second set of eyes on the price and terms.

Some would argue that the system of low percentage bank guarantees and bonds works just fine. But loss results are difficult, if not impossible, to come by on the banking side. And it ignores some rather obvious flaws.

As pointed out above, traditional payment bond or guarantees are largely absent. Any surety claim professional would agree that on average sums paid to subcontractors, labor and vendors far outstrips payments made to ensure performance. Claims typically occur when the contractor runs out of money, not because they don’t know how to build. Termination for performance is rare, unless it is a result of cash flow problems. Failure to staff the project, obtain and install materials and equipment or having critical path subcontractors abandon the project are all cash flow driven. Once in dire straits a contractor will “create” financing sources by delaying or simply not making payments to subcontractors, material suppliers, labor unions and taxing authorities. Then the bomb goes off – as it did with Carillion.

Supply Chain Factoring

Carillion was a habitual late payer refusing to adhere to the Prompt Payment Code which mandates 95% of total invoice payments to subcontractors and suppliers within 60 days while working to achieve 30 day payment terms. Instead, Carillion practiced 120 day payment terms enforcing a discount on invoices in return for earlier payment, which many took. Especially those smaller firms with tighter cash flow.


Carillion isn’t the first or only “performance” claim in modern history, yet the historically minimal percentage remains unchanged.


Who does that benefit? More importantly – who does it harm?




Same old status quo. But why?

Percentage bonds tend to hurt the portion of the ecosystem that keeps the engine humming in greater magnitude than it helps those that benefit.

In order to understand the who and how, one must begin by abandoning the all-encompassing, holistic underwriting process as it is known here in North America. Instead the underwriting principle is simply:

Percentage bonds + on demand language = “do they have the cash to pay us back”

This overriding criteria essentially takes on a commercial surety, or purely quantitative underwriting format.

While the banks may enjoy some greater secured position, it helps the banks and the sureties for the same reasons. If the cash and or available bank credit capacity is adequate to make restitution – game over. Simple underwriting at its best.

For these same reasons the largest corporates and contractors get the vast majority of the attention and capacity. Small to mid-sized firms need not apply. What results is a landscape dominated by a small number of ‘too big to fail’ companies.

Competition? Hardly. Another arena where taxpayers get hurt.

Passive Government

The UK government put cost ahead of quality as their primary factor in awarding contracts therefore setting the stage for contractors crafting their bids around lowest price and volume. Adding to the problem, once awarded the inadequately staffed system did not allow for a measure of quality control when it came to standards and performance.

The failure of the government has been attributed to a “part-time, semiprofessional government that does not provide the necessary degree of insights for government to manage risks around service provision and company behavior,” according to the House of Commons.

It is incredibly ironic then for the UK government to turn over these same responsibilities to Carillion on several privatized projects. Talk about the fox in the henhouse!

  • As a result of the 450 construction and service contracts that were interrupted or ceased, it cost taxpayers an initial £150 million in public funding to keep continuity with likely further funding required and zero recovery from Carillion.

Lax regulations were another significant failure. Several groups tasked with external corporate oversight and accountability either did not act or just weren’t empowered to.

  • Financial Reporting Council (FRC) had identified red flags in accounts dating back to 2015. They took no further action.
  • Pensions Regulator (TPR), failed to enforce their power to demand funding of unpaid pension contributions. Deficiency grew into the billions.

It bears repeating that the real losers are the subcontractors, vendors and lost jobs. In the absence of payment guarantees it ripples downward to destroy businesses and livelihoods we never hear about. The social impact on lost wages, resulting personal and business bankruptcies is incalculable to some degree. So is the erosion of faith in the governmental institutions charged with safeguarding the public interest (not to mention coffers).


Can this be prevented?

The Surety world, in places where small percentage bonds are the norm, is hardly recognizable to us here in North America. And not in a good way.

Contractors of any meaningful size may have dozens of sureties participating at different levels on some, but not all bonded projects. Further, the surety may not have any idea how much and what kind of risk exists in any of the projects where they are not participating.

So, who’s in control?

The answer is no one. And that’s the problem.

The direct economic value that surety bonds provide is visible only when something bad happens. The percentage bond system has developed an underwriting platform based almost exclusively on that scenario. Conversely, the North American model is based on preventing the disaster from happening in the first place. It’s a check valve on unrealistic and financially questionable appetites, unreasonable contractual obligations and places a premium on capabilities and project management. This is the direct result of the large percentage bonds (100% in the U.S., 50% in Canada), both performance and payment, and the obligation on the part of the surety to remedy defaults.

In other words, the obligation is to deliver the buyer what they contracted for, not simply write a check that places an economic band aid on a gaping wound.

These large surety percentages helped develop a surety marketplace with ample capacity and diligent underwriting talent to help forestall and reduce the impact of such problems. It’s designed to keep businesses honest.

Truth is most of the value from this system is never seen.

The unheard services of the surety industry. A byproduct of the large percentage system is the development of much closer relations between the surety, the broker and their client. So it is extremely rare that a problem comes as any surprise. More often than not the surety will fund the contractor through to completion, make payment to vendors subcontractors and direct labor to move the project to completion. In the small percentage bond arrangement, you don’t know if there’s a problem until someone demands a payment. Now. In full.


There must be a better solution. Right?

Easy. Just adopt the North America model. Unfortunately, it’s not that simple.

There exists some uniformity within the boundaries of one country on which to base such a model. For example, each state in the U.S. has laws on the books relating to surety requirements and obligations. Those, however, are all modeled in some manner on federal government statutes.

This presents significant challenges when you look at other areas of the world where geographic and economic forces push contractors across borders regularly. If the EU, or Organization of African Union or the Worldwide Chamber of Commerce championed such a goal for example, it would be a great thing. However, there are bigger issues at hand in the world.

The absence of legal platforms and statutes is only one part. There simply does not exist reinsurance capacity for the surety product in quantities that could adapt. Reinsurance takes significant portions of risk off the shoulders of the primary surety and is absolutely essential in order for the primary underwriters to take on larger percentage bonds and their resulting financial exposure. Interestingly, there is an abundance of reinsurance capacity looking for someplace to go these days. Now is a good time to get some attention.

Regarding adoption of more realistic bonding requirements, slow change generally equals better change. Incremental bumps to a 25% level, with the inclusion of payment bonds, would be a good start. More sensible are 50%, however this requires someone to break the ranks and make this the law of the land. Additionally the bond format will have to evolve from “pay on demand” into a performance completion agreement.

In 2016 Italy issued new bonding requirements to raise levels to 100%. While some fundamental flaws existed in the proposed regulations, it was a realistic attempt to adequately safeguard the public treasury. A coalition of large corporates and the surety industry themselves lobbied successfully to ensure it was not signed into law.

We refer you back to our chart of Helps vs Hurts.

Let us take a look inside the role of the surety industry itself which needs to shoulder much of the burden as well. We urge our international surety leaders to put effort and money into educating the public and politicians of the benefits of realistic bonding requirements. Get ahead of the curve in hiring and training competent underwriters and surety claim personnel.


Believe it or not…


It would be incorrect to end this missive without binding all of this together with supporting facts. While the massive amount of loss associated with Carillion is inescapably documented, so is the value of the surety product. It is worthwhile noting that the surety industry did, in fact, make good on an estimated $100,000,000 of Carillion’s obligations. This relief was disproportionally skewed toward countries with larger percentage bonds, such as Canada, as opposed to the UK where the lion’s share of the risk resided.

In the grand scheme of things, it simply was not enough. Now sadly, many for which it was not attempt to pick up the pieces, if there is anything left to pick up.

So let this be the takeaway – meaningful bonding requirements work.


  1. House of Commons. (2018). Carillion. Authority of the House of Commons, United Kingdom: Business, Energy and Industrial Strategy and Work and Pensions Committees.
  2. BBC News. (2018, January 19). Carillion: Six charts that explain what happened. Retrieved from https://www.bbc.com/news/uk-42731762
  3. Financial Times. (2007, December 10). Carillion buys Alfred McAlpine for £572m. Retrieved from https://www.ft.com/content/929e7eba-a6f7-11dc-a25a-0000779fd2ac
  4. Global Construction Review. (2018, October 11). Is the Middle East more prolific in generating disputes? Retrieved from http://www.globalconstructionreview.com/markets/middle-east-more-prolific-generating-disputes
  5. Marshall, Jordan. (2018, June 12). Carillion’s Qatari arm goes bust. Retrieved from https://www.building.co.uk/news/carillions-qatari-arm-goes-bust/5094043.article
  6. National Health Executive. (2019, January 1). Trust sets £320m cap on finishing Birmingham hospital hit by Carillion collapse. Retrieved from http://www.nationalhealthexecutive.com/Robot-News/trust-sets-320m-cap-on-finishing-birmingham-hospital-hit-by-carillion-collapse
  7. Scott, John. (2019, January 16). The calm after the storm: How Carillion’s collapse is still being felt in the West Midlands. Retrieved from https://www.expressandstar.com/news/business/2019/01/16/the-calm-after-the-storm-how-carillions-collapse-is-still-being-felt-in-the-west-midlands/

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It all starts with our Mission Statement. Understanding your business and your needs. But it goes deeper. We bring balance and insight to the situation. Our experience puts us in a unique consultative role. That alone is valuable, but without the right markets it’s a tree falling in the forest kind of thing. We represent the broadest possible array of surety companies in the business with worldwide capabilities, both traditional and innovative. There isn’t an answer for everything, but if it exists, we’ll find it.

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