Fears that supply chain will be left out of pocket from Carillion collapse

Fears are growing regarding the future of many more firms following Carillion’s collapse with as many as 30,000 SME’s estimated to lose up to £2.2bn through retentions payments, the firm’s Early Payment Facility (EPF) and for work already completed.

As the government vows continued support for public-sector Carillion subcontractors, there is potentially significant and serious ramifications for private-sector companies in the firm’s supply chain. According to the Building Engineering Services Association (BESA) and the Electrical Contractors Association (ECA), Carillion’s latest accounts show it sitting on £800m of subcontractors’ money being held in retentions with little hope of any money finding its way to companies who carried out work. 

While more than £350m of cash owed to Carillion subcontractors via EPF will also struggle to reach them. The system was run in conjunction with banks like RBS and Santander and allowed companies to be paid earlier than the firm’s 120-day terms for a fee. But the EPF stopped working leaving thousands of SME’s out of pocket once the construction firm went insolvent while banks continued as normal.

Carillion’s liquidation comes after Peter Aldous, MP for Waveney, introduced a draft bill to parliament last week, which seeks to amend the 1996 Construction Act to ensure retention money is held in a deposit protection scheme. The bill is designed to ensure situations like many find themselves in this week is avoided.

BESA president Tim Hopkinson said: “The bill was developed precisely with just this kind of nightmare scenario in mind,” said. “We are aware of the 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 is just being moved to another place and that SMEs will remain equally vulnerable.”

The two bodies have now released a five-point plan which they hope will receive widespread support so SMEs are protected from future financial crises.

The five-point plan that BESA and ECA are calling for is as follows:

• Any SME contractors already working on Carillion projects should be allowed to continue on these projects and be paid directly.
• The UK government must actively support the Peter Aldous bill on retentions and ensure it is allocated enough parliamentary time to progress.
• Major public sector suppliers like Carillion should be precluded from winning any further contracts unless it can prove it pays its supply chain promptly.
• Major corporate public sector suppliers like Carillion worthy of their own government account managers, and who rely on SME supply-chains for successful delivery must be made to implement transparent supply-chain payment systems, statutory public sector payment requirements, project bank accounts and no retentions, throughout the supply chain.
• Government must monitor and enforce the public sector 30-day payment supply chain model as opposed to Carillion’s own 126-day payment terms, which leaves thousands of SMEs struggling for cash flow to pay staff and suppliers.

ECA director of business, Paul Reeve, said: “Carillion’s move into liquidation places their huge supply chain - which includes many electrical and other specialist contractors - at risk of losing millions of pounds, which will threaten companies and jobs. 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?”

Following Carillion’s announcement this week, cabinet office minister David Lidington announced a 48-hour grace period for private sector employees. He added: "The position of private sector employees is that they will not be getting the same protection that we're offering to public sector employees, beyond a 48-hour period of grace. I think that is a reasonable gesture towards private sector employees."

There are fears within the construction sector that Carillion’s demise could trigger a “domino effect” among smaller sub-contractors. Brian Berry, chief executive of the Federation of Master Builders, said that many “innocent victims” could be brought down, if projects which had been outsourced to Carillion are put on hold or scrapped.

Speaking to BBC Radio 4’s Today programme this morning (17.1.18) Berry said: “Now we are in a very precarious position where thousands of workers don’t know quite what their position is and often they can’t get on site.Carillion actually aren’t doing the work, they are relying on sub-contractors to do the actual building work. Those companies are relying on the money coming from Carillion, that has stopped.”

There are numerous reports of Carillion suppliers being left with unpaid invoices for work done in recent weeks and there are real fears that such bills will not be paid by the Official Receiver, especially given the fact that creditors are only expected to get one penny for every pound they are owed.