Carillion Collapse Is Urgent Alarm Call

Posted in The Industry on January 30, 2018


The financial fall-out from the collapse of construction giant Carillion will have an impact on the sector's supply chains for many years to come.

The damage already being caused to hundreds of small businesses and thousands of their employees shows just how important it is that the UK now puts legal protection in place to protect SMEs from the scourge of late and delayed payment.

This long expected wake-up call for politicians and business leaders cannot be ignored because perfectly sound and well-managed companies are being pushed into insolvency through no fault of their own. Anyone connected with the construction industry knows that SMEs in project supply chains have been vulnerable for years. It is thought that as many as 30,000 smaller firms may be owed money by Carillion, which went under carrying over £1.5bn of debt. A big chunk of that money was in the form of 'retentions' held back from final payments to sub-contractors; often for years.

This has prompted calls from industry bodies for immediate reform of payment practices to ensure any future construction insolvencies do not have the same catastrophic impact on employers right across the country.

Security

The Secretary of State for Business, Energy and Industrial Strategy Greg Clark met a delegation from the building engineering sector a few days after Carillion collapsed. They stressed the importance of implementing payment security measures; such as placing retention payments into a guaranteed trust account. They also urged him to consider banning extended payment terms, such as the 126-day model used by Carillion.

A survey carried out by the Building Engineering Services Association (BESA) and the electro-technical and engineering services body ECA revealed that the average payments outstanding from Carillion to micro-employers (with less than 10 employees) stood at £34,000. Small firms (10-49 employees) were owed around £40,000 and medium-sized contractors (50-249 employees) were facing average losses up to £100,000.

The very largest firms are owed on average £1.5m, but Balfour Beatty has already publicised a potential loss from Carillion of between £35m and £45m.

Carillion's liquidators PwC have already stated that they will not honour payments for work completed prior to January 15 leaving many contractors with a serious financial shortfall. On top of which, firms seeking to pull out of contracts are being threatened by their own suppliers with cancellation fees for equipment and materials of up to 25%.

The two bodies had already helped to draft proposed legislation, introduced to Parliament by Peter Aldous MP just a week before Carillion collapsed, which could have protected small businesses from some of these losses.

The 'Aldous Bill' seeks to amend the current Construction Act to ensure that retention payments are protected by being placed in a special ring-fenced deposit protection scheme. It also advocates retention payments never being held back for more than 12 months. "There are frantic attempts going on behind the scenes to rescue Carillion's projects and switch them to other contractors, but unless retention money is protected, there is a danger that the problem will simply be moved to another place and the same thing could happen all over again," said BESA President Tim Hopkinson.

The Aldous Bill, which has attracted widespread cross-party support, highlights the fact that more than £10.5bn of SMEs' potential working capital is locked up in retentions every year and £700m was entirely lost to them over the past three years. This adds up to £20m a month, £4.5m a week or £900,000 per working day – a huge amount of working capital that they could be spending on growing their businesses and improving their productivity. It is also money that has not been available to recruit and train apprentices meaning the sector's skills base is seriously underfunded and, therefore, undermined.

On the plus side, the high profile nature of Carillion's demise has put this decades old problem into the full glare of national publicity. It is going to be very hard for politicians and business leaders to carry on ignoring the frustrations many construction-related specialist firms have been expressing for years.

Sub-contractors have grown increasingly weary with a process that forces them to act as bankers to larger companies who hang onto their cash to fund their own debt.

However, with the ongoing inquiry into the Grenfell fire disaster also revealing many unpalatable truths about a financial model that encourages cost-cutting and low quality installation work, this is an opportunity that our law makers simply must not miss. They should now move quickly to adopt the 'Aldous Bill' and also look at other regulatory methods that force clients to demand top quality work secured at a fair price.

As well as driving up building quality, this will also start to re-invent the industry's supply chain model and make it a healthier place for employers – of all shapes and sizes – to grow and thrive. This would, in turn, have significant positive implications for our society and economy.


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