Opinion

Carillion collapse exposes corporate deviance at construction’s heart

Like Carillion, many construction firms lack an early warning system to alert them of corporate malpractice, cautions Dr Sara Hajikazemi

The collapse of corporate giant Carillion in January 2018 highlights a culture of financial deviance embedded at the heart of the UK construction sector.

New research by London South Bank University (LSBU) shows that, following the collapse of a major financial institution like Carillion, individuals and teams in the wider construction sector, often accommodate, explain away or normalize discrepancies and problems. These become part of a culture which unintentionally reduces awareness of the potential consequences of that deviant behaviour.

“The analysis suggests that ‘normalisation of deviance’ lies not only internally, but also externally, in the wider industry environment in which construction organisations operate.”

Taken together, these factors can result in a company not following codes of practice while failing to anticipate and manage a wide range of potential reputational issues and structural internal crises.

By performing a qualitative analysis on the collapse of construction giant, Carillion, using publicly available documentation including Carillion’s own commercial reports to auditors, Parliamentary reports about Carillion’s activities, and news coverage, LSBU has exposed the most common deviant practices and sources of ‘normalisation of deviance’ embedded in the sector.

The findings suggest that ‘normalisation of deviance’ lies not only internally, but also externally, in the wider industry environment in which construction organisations operate. The results sound an alarm bell and call for structural reform of the construction industry to prevent the negative effects of corporate deviance.

The term ‘Normalisation of deviance’ was first introduced by author Diane Vaughan (1996) in her book ‘The Challenger launch decision’. The concept requires three specifications:

  • Human based errors and deviations;
  • The deviation occurs repeatedly over time;
  • The deviation does not cause an immediate, undesired effect.

The research detected three distinct types of ‘normalisation of deviance’ that existed within Carillion before the corporation’s collapse that could also be prevalent in the wider construction sector:

  • Late payment to suppliers;
  • Aggressive accounting;
  • Auditors failing to identify problems.

These three types of ‘normalisation of deviance’ have been categorised as internal or external, depending on whether they related to the company under observation or its main stakeholders. While in hindsight, these practices could be viewed as unacceptable, their emergence was a gradual process that took place over several years. This pattern of corporate behaviour indicates that ‘normalisation of deviance’ is likely to be embedded in corporate culture and very difficult to detect in the initial stages of its development.

We found that the business characteristics in the construction industry, with its highly competitive and pressurised culture, low profit margins, complex and uncertain undertakings, have all contributed to the emergence of questionable business practices.

Our research shows that ‘normalised deviance’ has always been present in the construction sector.

What is concerning is that, as happened with Carillion, construction companies currently lack an early warning system that could alert them to emerging signs of deviant corporate behaviour and malpractice. This means that the construction industry is still likely to be at risk of falling prey to ‘normalised deviance’ and its damaging consequences in future.’

Dr Sara Hajikazemi is senior lecturer in project management at LSBU’s Business School. She produced the research in collaboration with co-authors from the Norwegian University of Science and Technology and Nord University in Norway, and the University of Oulu and Tampere University in Finland.

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Comments

  1. Carillion and organisations like Carillion have lost their way in construction. The industry is now run by accountants not by people who know how to build buildings. If you run a site efficiently and you purchase wisely and know how to put things together safely and get the best out of your workforce and the directors of the Company are builders, the Company should pay it’s way and be able to survive with the correct advise from the accountants.
    This does not seem to happen nowadays.
    Steve Crow (ex project manager Ballast UK)

  2. misunderstanding and misuse of CVC’s (cost value comparisons) is often a problem

  3. To characterize Carillion’s downfall as the result of deviant corporate behavior is naive and misses the point. Late payments to subcontractors, aggressive accounting and dozy auditors are not unusual in construction, and stem from the suicidal risk/reward imbalance which the industry specializes in. Until this changes, and clients begin to pay the true cost of their projects, most large contractors would do as well visiting Ladbrokes.

  4. Carillion was built for many years on a “knife edge ” and cash was the imperative more than profit . Surely an early warning system for management was of no use as they appear to have known exactly what was going on ? The accountants running construction companies has to stop but how did such a great company have such a lot of “construction issues ” as well at it’s demise ? Was the cost cutting endemic throughout the business ?

  5. Sadly the comment on running a job correctly no longer applies to the majority of major contractors. Its to do with the margins available to them on the frameworks that they are on, some are good some are bad but you need a balance to keep it going. In the case of Carillion this balance failed and the majority of their pots ended up as poor payers, which compounded with losses on projects pushed them over the edge. What needs to be remembered is that this did not happen over night, these frameworks were renewed two or three times with ever tightening margins, making them unviable. These were of course government frameworks, so whilst there may have been wrongdoing at Carillion its not a one sided story and a long hard look needs to be taken at their ability to be profitable

  6. I agree fully with Steve Crow. He put it right 100% of what is going on. This is not UK only, but it is widely used in many countries globally.

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