The effects of the Carillion collapse are still being felt in the UK’s construction supply chains. Clients and main contractors, take note.
On 15 January 2019, it was a year since UK contracting giant Carillion went into compulsory liquidation.
Blaming problems with three large public-private partnership (PPP) projects in its home market, and unpaid bills in the Middle East and Canada, its borrowing stood at £1.3 billion at that point.
Some of the financial impacts on the many firms in its supply chains were immediate. It owed £2 billion to its 30,000 suppliers, subcontractors and short-term creditors.
Most were so far down the priority list of creditors that there was little chance they would get their money.
“We’ve seen a significant effect on major contractors who were in joint venture with Carillion, where our customers have had to take over Carillion’s work, employees, administration and the like,” reports Mike Johnson, Senior Partner at JLT Construction.
Carillion’s former joint venture partners have also been forced to shoulder a bigger proportion of the risk, with all the implications that brings.
All this may lead to a more cautionary approach before entering into joint ventures.
Other impacts are still emerging today, with the ripples spreading far beyond those contracts where Carillion was directly involved.
The issues that Carillion’s fall has raised will almost certainly lead to changes in the way that large projects and work programmes are procured.
Fighting for turnover
One of the earliest knock-on effects of Carillion’s halted projects was an increase in competition for trade packages, as firms fought to secure turnover for their employees and businesses.
Mark Smith, CEO of structural steel specialist Billington, told Construction News that the impact was immediate and lasted for months: “We were competing for the same projects and found there was a bit of a feeding frenzy.”
Greater competition inevitably means that prices fall and, somewhere down the line, firms are forced to take on jobs with little or no margin. With a few such jobs on the books, it only takes a problem on one contract to drag the whole lot to the floor.
Materials suppliers felt the shockwaves too. Building products supplier Alumasc was not owed any money directly by Carillion but reported – with turnover and profit down – that bad debts had affected the working capital cycle of the contractors they supply to, which in turn had delayed orders.
Poor cash flow has been compounded for some by an increase in caution around lending from some banks. Lending to all construction firms has fallen over the course of 2018, with SMEs particularly hard hit.
Analysis of Bank of England data by debt adviser Hadrian’s Wall Capital shows that total lending to SME construction firms fell by almost £1.2 billion, or 7 per cent, in the year to September 2018 when compared with the same period to September 2017. Lending to large construction businesses fell 3.5 per cent.
Santander reported an increase in loan writedowns, citing the Carillion collapse as a major factor. The bank was reported to operate a supply chain finance scheme for Carillion’s suppliers, through which they could secure earlier payment of invoices in return for a fee.
With four government bodies investigating the collapse of Carillion and three related inquiries, the past year has raised some uncomfortable questions for the UK construction industry.
Among these are the perennial issue of how long main contractors take to pay invoices, with many exceeding the 30-day fair payment target set by the government.
There is also the still poorly understood issue of risk. Clients need to understand risk better and stop looking to push it all onto the main contractor, says Johnson.
There could be a move towards more packages, let to more contractors to spread the risk.
“The tier-one contractors will start pushing back on the amount of excessive risk they are being expected to shoulder,” predicts Johnson, “although current evidence is that this remains a continuing uphill struggle.
“Perhaps, in consequence, tier-two will show greater flexibility to take on some of the projects that have previously been out of reach.”
With specialist trade contractors stepping up to take on these somewhat larger packages, it potentially leaves gaps in supply chains elsewhere.
Lower status projects may be forced to look for specialists in lower, less experienced tiers.
Cost rises could also be on the cards, says Johnson. Clients may decide that cheapest is not necessarily the best, since squeezed margins mean a higher insolvency risk.
An increase in the size of bonds could also bump up costs. Currently at around 10 per cent of contract value in the UK, where they are applied, we could see these rise to 15 or 20 per cent, considers Johnson.
They may also become more common down the supply chain and we could see the wording of bonds changed so that they are more akin to on-demand bonds.
“Those would only be available to a well-capitalised contractor,” comments Johnson.
One thing all members of a supply chain can expect – and should employ themselves – is more rigour during the due-diligence process.
Financial checks often rely on historic data, which can be misleading in an industry where margins are small and the ill- effects on one job can snowball.
Some experts suggest including contractual terms that allow the client to have ongoing sight of management accounts for the duration of a project.
Solvency could be checked regularly by monitoring the ratio of a contractor’s cash and bank facilities against its liabilities, with changes in this ratio ringing alarm bells.
Visits to current projects, where possible, can also be enlightening, as the first signs of financial woes are often seen on site: the best tradespeople start jumping ship, agency workers may take their places and, in some cases, the quality of workmanship can fall.
“Failing subcontractors tend to cut corners,” says Johnson. “If a subcontractor is showing signs of strain then it is important to ensure any potential professional liabilities, in particular, are notified to their policies in goodtime.” (PI insurance being arranged on a claims made basis). One year on, we haven’t seen the end of the Carillion aftershocks yet.
For more information, please contact Mike Johnson, Team Head on +44 20 7528 4759.