Carillion collapse: early industry reaction

Carillion collapse: early industry reaction

The aftermath of the collapse and liquidation of Carillion will undoubtedly have far-reaching consequences for the construction sector and beyond. PBM considers some of the initial responses on the developing story:

 As reported by Glenigan, the failure of a firm of Carillion’s size has significant implications, not only for its clients and employees, but also its supply chain and competitors. Infrastructure and public sector projects account for the majority of Carillion’s project workload, although the firm is involved in a wide range of projects spread across the UK and sectors including education (17%), private housing (11%), social housing (10%), offices (7%) and hotel / leisure.

Whilst some of its activities are more broad-based ‘service provision’, construction and maintenance are central to its operations — and Glenigan is keeping under review all 188 active construction projects with which Carillion is involved, including frameworks and joint ventures.

As Glenigan attests, Carillion’s collapse holds clear risks, not only for suppliers’ cash flow and balance sheets, but potentially for the wider industry’s supply chain. Whilst the official receiver has reassured subcontractors that they will be paid for future work on Carillion projects, subbies and suppliers will join the list of creditors for any payments on outstanding work. Main contractors will wish to assess the exposure of their own supply chain and to work with them to minimise any risks.

The Federation of Master Builders (FMB), meanwhile, has said that the Government must learn from Carillion’s demise and assess its “over-reliance” on major contractors. Brian Berry, Chief Executive of the FMB, commented: “Carillion’s liquidation is terrible news for all those who work for the company and it will have serious knock-on effects for the many smaller firms in its supply chain, some of which will be in serious financial danger as a result of Carillion’s demise.

“The Government needs to open up public sector construction contracts to small and micro firms by breaking larger contracts down into smaller lots. That way, it can spread its risk while also reaping the benefits that come from procuring a greater proportion of its work from a broad range of small companies.”

One concern, of course, is that Carillion’s reliance on sub-contractors means that it is actually almost impossible to quantify the full impact of the firm’s demise. In a piece compiled by City AM’s Digital Editor Emma Haslett, analyst for Liberum Joe Brent said: “There are inevitably questions about the ability of the supply chain to withstand this shock.” He explained that whilst Carillion “arguably only has a three per cent share of wider industry” and “tended to rely more on sub-contractors than builders’ merchants”… “the liquidation will only affect companies with similar supply chains.”

The problem, of course, is that such sub-contractors will have their own supply chains which will now be under pressure. And from a wider industry perspective, as Joe Brent continues, this risk is also that “failures among tier two suppliers and below, feed back up the system towards the tier one contractors.”

Iain McIlwee, CEO British Woodworking Federation, said: “As the news of the liquidation of Carillion breaks, it is almost ironic that we are putting our final comments in on the Government’s consultation into retention payments in the construction industry. This debate is not about whether the state should bail out Carillion, but whether Government can in all conscience turn its back on a supply chain of SMEs who will end up carrying the can for poor procurement, bad business management and an endemic failure by the Government to address some of the archaic procurement practices surrounding late payments and retentions that place risk unfairly on SME sub-contractors.

“Many of the creditors are SMEs and the sums, whilst likely to be significantly lower than the liquidators will take, could define the future of these businesses — it would be a gross injustice if their money unfairly held is lost in this process.

“Frankly to my mind the Government is complicit in the sorry saga that is unfolding and we need decisions fast. As a short term we need to see some security against these retentions and unjust payment clauses. Moving forward we urge the Government to develop a structured and more consistent legislative process to deal with market failures, be they banks, construction firms or steel manufacturers.

“We cannot rely on arbitrary decision making and political posturing. There needs to be clear process to ensure those responsible foot the bill and ensure society and supply chains do not suffer unduly. The Government consistently fails to recognise the stress of running a small business and keeping people employed — a lot of business owners in this supply chain won’t be sleeping soundly until this is resolved.”

Richard Beresford, Chief Executive of the National Federation of Builders, said: “When a major contractor goes into liquidation, it highlights the importance of diversifying those to whom you award contracts. When a company does go into administration, those suppliers owed money in retentions are unlikely to be paid, even though they have already provided skilled services.”

He added: “Many large regional contractors miss out on work simply because they are not among the usual suspects. Let’s not forget that £10.5 billion of the UK construction industry’s annual turnover is withheld in retentions by clients and large contractors from regional SMEs in their supply chain.”

The National Chairman of the Federation of Small Businesses, 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.

“These unpaid bills may well go back several months. I wrote to Carillion back in July last year to express concern after hearing from FSB members that the company was making small suppliers wait 120 days to be paid. 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.

“When the dust settles on this sorry saga, there is also 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.”

Speaking recently to the BBC, Speaking to the BBC, the FSB’s Alan Soady also said: “Our hope now is that Carillion customers can go direct to the giant’s small subcontractors to see projects completed — alternatively a new bridge between Carillion customer and supplier should be found.” 

For comment from the Builders Merchants Federation, click here

PBM will continue to cover the impact of Carillion’s failure over the coming months. Please email or Tweet @PBMmagazine if the consequences, directly or indirectly, are having an impact on your business.

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