{"id":451944,"date":"2022-02-07T12:53:19","date_gmt":"2022-02-07T12:53:19","guid":{"rendered":"https:\/\/www.constructionnews.co.uk\/?p=451944"},"modified":"2022-02-07T12:54:06","modified_gmt":"2022-02-07T12:54:06","slug":"five-jobs-that-killed-carillion-the-1-3bn-lawsuit-in-detail","status":"publish","type":"post","link":"https:\/\/www.constructionnews.co.uk\/contractors\/carillion\/five-jobs-that-killed-carillion-the-1-3bn-lawsuit-in-detail-07-02-2022\/","title":{"rendered":"Five jobs that killed Carillion: the \u00a31.3bn lawsuit in detail"},"content":{"rendered":"

A \u00a31.3bn lawsuit against Carillion’s former auditor, KPMG<\/a>, was filed last week, revealing new details about how badly some of its jobs were going.<\/p>\n

To support the Official Receiver’s (OR) case against KPMG, which alleges that the auditor did not sufficiently interrogate and challenge project information provided by Carillion’s management, the OR carried out a thorough analysis of 20 Carillion jobs. Ranging from relatively minor \u00a311m public sector works, to huge, \u00a3400m-plus regenerations, the analyses show how projects were reported to be doing much better than they were.<\/p>\n

In many of the cases, Carillion’s teams insisted to KPMG that they could turn around struggling and problem projects through cost management and claims against clients. But the OR argues that the evidence to back up these claims was often flimsy. It claims that KPMG’s auditors should have picked up problems early on, and that by highlighting them, the company could have avoided \u00a31.1bn in trading losses by being forced to take action sooner.<\/p>\n

KPMG has vowed to “robustly” defend itself, adding: “Responsibility for the failure of Carillion lies solely with the company\u2019s board and management, who set the strategy and ran the business.”<\/p>\n

Here are details of five of the projects analysed:<\/p>\n

Aberdeen Western Peripheral Route<\/strong><\/h3>\n

Carillion held a 33.3 per cent stake in the PPP project, alongside partners Balfour Beatty and Galliford Try. Before the consortium \u2013 which would also invest in the project \u2013 had closed the deal, Carillion had forecast it would receive revenue of \u00a3177.8m and a profit of \u00a312.4m on the project, equivalent to a 7 per cent margin.<\/p>\n

Problems began before the contract was signed, with the diversion of utilities well behind schedule, creating a four-month delay. The contract meant the joint venture would have to pay a penalty for delays, which meant that before they had finalised the contract, the margin had already been eroded to around 3.6 per cent.<\/p>\n

The delays \u201cappeared\u201d to be due to the client, Transport Scotland, being late in appointing and paying the utility providers, the OR’s analysis states. But Transport Scotland told the consortium they would get no compensation for this and that any request for time, money or contractual protection would lead to them losing preferred-bidder status, and procurement for the whole AWPR would be reopened.<\/p>\n

The JV signed the contract on 10 December 2014. It acknowledged that the margin had been slashed to 3.6 per cent, but claimed a 5 per cent margin might be possible through close management of utility subcontracts and rescheduling works.<\/p>\n

Once work started, problems mounted due to the need to self-deliver earthworks, difficulty getting aggregates and site batched concrete, a shortage of local contractors and labour, and environmental problems related to surface runoff.<\/p>\n

Costs started to spiral. The JV initially forecast the job would cost \u00a3496m. A year after it signed the contract, that had risen to \u00a3617.6m. Just over a year after that, in January 2017, it had reached \u00a3940m \u2013 more than half a billion higher than the initial forecast. Carillion\u2019s forecast share of the loss was \u00a3122.3m.<\/p>\n

This was not reflected in Carillion’s accounts, however. Despite the recognition in the JV of the project\u2019s dire position, Carillon reported it was making a \u00a312.4m profit \u2013 in line with the 7 per cent margin that had been blown out of the water before the contract was signed \u2013 in 2015. By the end of 2016, this had changed into a \u00a310m loss, which was still well short of the true picture.<\/p>\n

The OR argues that the deterioration from profit to loss between 2015 and 2016 should have prompted further investigation by KPMG.<\/p>\n

In addition, it claims KPMG did not challenge a \u00a377m claim that Carillion said it was entitled to in 2015 for contract delays. The auditor did not query it with the client, Transport Scotland, to ascertain its position either.<\/p>\n

By the OR\u2019s calculation, rather than a \u00a312.4m profit in 2015 and a \u00a310m loss in 2016, Carillion should have shown a \u00a328.1m loss in 2015 and a \u00a3128.9m loss in 2016.<\/p>\n

The Royal Liverpool Hospital<\/strong><\/h3>\n

Carillion signed a \u00a3286.1m contract to design and build a new hospital and car park in Liverpool in December 2013. The agreed completion date was 31 March 2017. Carillion\u2019s forecast margin when it won the job was 3.56 per cent.<\/p>\n

The job was hit by a number of problems, with Carillion citing the discovery of asbestos. Carillion also pointed the finger at its subcontractors, with claims against some of the design consultants and specialist subcontractors. By the end of 2016 it was 35 weeks behind schedule.<\/p>\n

Despite the various problems, Carillion continued to report that the job was profitable with a consistent 5.5 per cent margin every year between 2014 and 2016.<\/p>\n

But these figures were subject to management adjustment. By 2016, the adjustment was worth \u00a353.6m, which meant the company could report it was on course to make a \u00a313.2m profit on revenue of \u00a3299.4m.<\/p>\n

Among the adjustments was \u00a324.4m worth of legal claims that Carillion was recognising as revenue. But the OR claims that none of these claims had advanced to a position where Carillion could recognise them as having even a probable chance of succeeding and count as revenue.<\/p>\n

By the end of 2016, Carillion was claiming it had made a profit of \u00a33.2m so far on the job. The OR assessment found it had actually made a \u00a390.7m loss.<\/p>\n

The legal claim against KPMG argues a \u201creasonably competent auditor\u201d would have queried the margin, which was the same every year and ahead of the tender margin. It also failed to test the legal claims Carillion was recognising, according to the OR.<\/p>\n

Midland Metropolitan Hospital<\/strong><\/h3>\n

Carillion won a \u00a3296.9m contract in December 2015 to build the 630-bed hospital with a tender margin of 6 per cent. Delays hit the project early on, mainly due to issues with the structural and M&E designs.<\/p>\n

The site team was forced to make a series of downward revisions to the expected margin. Five months into the job in May 2016 it had been cut from 6 per cent to 4.8 per cent. By the end of 2016 it was down to -0.9 per cent. Two months later in February 2017 it had sunk even further, to -5.2 per cent.<\/p>\n

However, the position paper provided to KPMG in December 2016 showed the job was on course to make a 6 per cent margin.<\/p>\n

The OR said a \u201ccompetent auditor\u201d would have picked up on the delays to the job and challenged the 6 per cent margin that the firm’s management had forecast. They would have also found \u201cthrough the conduct of an adequate audit\u201d how the site team\u2019s forecast had deteriorated.<\/p>\n

Msheireb Downtown Doha (Qatar)<\/strong><\/h3>\n

The Msheireb Downtown Doha project was to see Carillion build low- and medium-rise buildings to house apartments, a hotel and offices across 50,000 square metres in Doha, Qatar. Carillion signed a \u00a3402m fixed-price contract in 2012 for the job. It did so in an 80:20 joint venture with Qatar Building Company, with Carillion the majority partner.<\/p>\n

Work started in December 2011 and was due to be completed by June 2014. But it was dogged by continual design updates from the client, with Carillion claiming it received around 10,000 new drawings and specifications in the first six months. This made progress difficult, it said, and by the end of 2017, the project was still incomplete and was not expected to finish until August 2018 \u2013 more than four years late.<\/p>\n

The delays and variations led to Carillion submitting a large number of claims for time and money. By December 2016 it had made claims for variations for QAR 851m (\u00a3173m), but only QAR 160m (\u00a333m) had been agreed with the client.<\/p>\n

Carillion was struggling to get money out of the client, and the chief executive, Richard Howson, was making regular visits to the country to try to get payment. The firm even sought the assistance of a UK government minister to help it with negotiations.<\/p>\n

Despite these problems, Carillion presented the project as profitable to KPMG. In 2016, when the job was two years late, it reported a profit of \u00a311.2m. According to the OR\u2019s calculation, Carillion, with its 80 per cent share of the overall loss, should have reported a loss of \u00a3298.6m on the job.<\/p>\n

The OR said the contract, which was one of the group’s largest and years behind schedule, should have prompted KPMG to challenge Carillion\u2019s consistent reporting of profit on the job.<\/p>\n

Taunton Northern Inner Distributor Road<\/strong><\/h3>\n

It was not just the big jobs Carillion got wrong and misstated, according to the OR \u2013 the small ones had problems, too. One example was a 1.6km road that Carillion built in Taunton town centre. It signed a \u00a310.9m contract with a 7.4 per cent margin in July 2013, with a completion date of February 2015.<\/p>\n

The job was delayed, primarily due to design problems with a bridge and embankments. The job ended up being finished more than a year and a half late, in July 2017.<\/p>\n

Carillion had issued a number of claims against the client, Somerset County Council, none of which were accepted. Following mediation between the two, the client offered to settle all disputes, which amounted to around \u00a325m, if Carillion would accept \u00a315.2m for the job. Carillion rejected this and, after a number of adjudications, some of the disputes were found in Carillion\u2019s favour and some in the council\u2019s. The disputes had still not been fully settled when the contractor was liquidated in January 2018.<\/p>\n

Despite the late delivery, the uncertain claims and Carillion\u2019s internal team forecasting a \u00a33.3m loss, it presented KPMG with a paper that said it would break even on the job. The OR has estimated that Carillion should have reported a \u00a312.6m loss on the job, given the position of its claims.<\/p>\n

The OR has argued KPMG should have challenged whether the values in dispute should have been included in the profit\/loss forecast. They alleged the auditors accepted claims made during a site visit by local management that they were \u201cvery confident\u201d they would recover more than \u00a324m on the job, without obtaining any evidence to support this view.<\/p>\n","protected":false},"excerpt":{"rendered":"

A \u00a31.3bn lawsuit against Carillion’s former auditor, KPMG, was filed last week, revealing new details about how badly some of its jobs were going. To support the Official Receiver’s (OR) case against KPMG, which alleges that the auditor did not sufficiently interrogate and challenge project information provided by Carillion’s management, the OR carried out a …<\/p>\n","protected":false},"author":26091,"featured_media":381424,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ep_exclude_from_search":false},"categories":[531,578],"tags":[],"yoast_head":"\n\n\n\n\n\n\n\n\n\n\n\n\n\n\t\n\t\n\t\n\n\n\n\n\t\n\t\n\t\n