Procurement · 16 January 2018

Carillion collapse puts thousands of suppliers and sub-contractors at risk

Cranes
Small suppliers are thought to be owed roughly £800m from Carillion

The collapse of construction giant Carillion could be highly damaging for thousands of small British firms, according to a number of leading industry organisations.

The Federation of Small Businesses (FSB) is one of a growing number of business groups to have called for payment protection for Carillion’s small suppliers and sub-contractors, of which there are thousands.

The Building Engineering Services Association (BESA) and the electrotechnical and engineering services trade body, the ECA, are also among the organisations to have expressed concerns for Carillion sub-contractors in the wake of the company’s demise.

The UK’s second biggest construction firm was believed to have debts amounting to around £1.5bn when it went into liquidation in 15 January, owing roughly £800m in retention payments to small suppliers and sub-contractors.

Worries have arisen that much of this money may now be lost, putting the survival of many of Carillion’s sub-contractors at risk.

FSB national chairman, Mike Cherry, said: “It is vital that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion’s own employees.”

Why a change of mindset is needed to solve the UK’s late payment problem

Paul Reeve, director of business at the ECA, added: “Carillion’s move into liquidation places their huge supply chain at risk of losing millions of pounds, which will threaten companies and jobs”.

Carillion
Carillion went into liquidation on 15 January

“While this is a clear and present disaster for construction and wider maintenance, the question will ultimately follow, why did Carillion appear so attractive to clients even as they moved towards collapse?”

According to Cherry, Carillion’s unpaid bills are likely to stretch back several months at least. The FSB head wrote to Carillion bosses in mid-2017 expressing concern, after FSB members claimed the firm had made its small suppliers wait 120 days for payment in some cases.

He went on to say: “Sadly, these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren’t it would be easier to spot the warning signs of a huge company in financial trouble.”

In response to Carillion’s collapse, BESA and the ECA have urged the government to introduce an action plan to safeguard businesses in the construction sector.

The plan indicates that small business contractors already working on Carillion projects should be allowed to continue to work be paid directly, and outlines that in future, major public sector suppliers like Carillion should be precluded from winning any contracts unless it can prove it pays its supply chain promptly.

Individual account managers should be appointed to oversee major suppliers like Carillion that rely on SME supply chains, and the government should force these suppliers to implement transparent payment systems, statutory payment requirements and project bank accounts with no retention.

Late payments: Just two per cent of firms think small business commissioner will help

In addition, BESA and the ECA urged government to monitor and enforce the public sector 30-day payment supply chain model, as opposed to Carillion’s own 126-day payment terms, for example, which left thousands of small companies struggling with cash flow.

Commenting on the action plan, BESA president Tim Hopkinson said: It is time for the abuse of the retentions system to end, and for sub-contractors’ hard earned money to be protected from this kind of supply chain failure. Well run businesses are being starved of vital working capital and put at risk of insolvency through no fault of their own.”

Cherry added: “When the dust settles on this sorry saga, there is a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses.

“Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system, and the government should prioritise meeting its target of at least one third of taxpayer-funded contracts going to smaller firms.”

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

Q&A

If you’ve found the article above useful, but have a more detailed and bespoke question, then please feel free to submit a query to our expert. We at Business Advice will get in contact with them on your behalf and arrange for a personalised response. These questions and answers will then be collated on the site for any other readers who have similar queries.

Ask a question

Health and Wellbeing