The global market woke up Monday (Jan. 15) to news that construction conglomerate Carillion, based in the U.K., went into liquidation, setting off alarms throughout the industry and Carillion’s own supply chain.
U.K. ministers held an emergency meeting to discuss the matter, according to BBC reports, where policymakers addressed “how contingency plans are operating.”
“In the wake of the collapse of the contractor Carillion, it is time to put an end to the rip-off privatization policies that have done serious damage to our public services and fleeced the public of billions of pounds,” said Labour Party Leader Jeremy Corbyn in a video posted to his social media accounts. He called the situation a “watershed moment.”
Carillion is the nation’s second-largest construction company involved in projects for schools, hospitals and prisons. According to the publication, the company has 450 government contracts.
The company’s liquidation rocked the market and raised concerns about the government’s practice of outsourcing to private companies and about the future of Carillion employees.
But one of the most pressing concerns is how Carillion’s collapse will send shockwaves down its supply chain and onto its supplier base.
Payments in Doubt
“When these large concerns go into liquidation, the secured creditors will mostly be paid, but the little man, the small business and the paper supplier could lose thousands of pounds in unpaid invoices,” stated Ian Carrott of ICSM in an interview with SignLink posted Monday. “We’ve seen this in the printing and sign industry last year with many people being left with nothing.”
“Carillion outsourced everything,” said Specialist Engineering Contractors’ Group Chief Executive Officer Rudi Klein, according to Bloomberg reports. “It was a management company; it wasn’t a construction company or an infrastructure company.”
Klein added that the company’s suppliers are “desperately” trying to understand exactly how they will be affected by the liquidation.
“Its payment performance to its suppliers was appalling,” the executive said.
According to Bloomberg, Carillion’s supplier base included hundreds of small- and medium-sized enterprises involved in the firm’s public contracts. Already, some of its business partners are feeling the hit: Balfour Beatty, which struck a previous joint venture with the company, said it is expecting a financial impact of $48.2 million from the liquidation; Speedy Hire, an equipment renter working with Carillion, saw its shares decline 12 percent.
One small Carillion supplier that spoke with the BBC said the company owes it more than $110,000. The publication said the government has agreed to pay employees as well as small businesses working with the conglomerate on public contracts, according to Minister to the Cabinet Office David Lidington.
Late Payments a Persistent Issue
As details emerge about Carillion’s treatment of suppliers, its collapse adds to mounting pressures on an industry rife with late payments.
Research released by Bibby Financial Services (BFS) in 2016 found more than half of construction subcontractors agree they feel powerless to encourage faster invoice payments by their larger construction partners. In a statement at the time, BFS Managing Director of Construction Finance Helen Wheeler described the conflict as “the battle of David versus Goliath.”
“Larger contractors [are] wielding the power, and smaller firms [are] reluctant to negotiate terms through fear of losing future work or gaining a reputation for being difficult,” the executive explained.
Researchers found more than 27 of subcontractors cited late payments from their top contractors as their biggest challenge — more than a skill shortage or the health of the economy, BFS said.
Government Action
As the U.K. government scrambles to support employees and small suppliers of the now-defunct company, regulators have also taken measures to encourage healthier B2B payment practices in the construction industry overall.
In 2016, the government’s Construction Leadership Council (CLC) adopted the Construction Supply Chain Payment Charter, a voluntary agreement for members of the construction industry to pay their small suppliers within 30 days. But, like the U.K.’s more general Prompt Payment Code, there is no way to enforce that agreement. In its announcement, the Council admitted that the Prompt Payment Code had done little to impact payment practices in the construction industry thus far.
“There is only a sporadic correlation between signing the code and actually paying suppliers promptly,” the CLC said.
According to Bibby Financial Service’s Wheeler, the payments climate in the U.K. construction sector is painfully clear.
“It is unsurprising but discouraging that late payment from main contractors is still an issue for smaller construction firms across the country,” she said.
In the case of Carillion, which outsourced not only to subcontractors but also to an array of B2B firms, collaboration with Carillion has turned from a risk of late payment to a risk of non-payment altogether.
“PwC must put workers and suppliers at the head of the queue for payment — not the banks and certainly not the Carillion boardroom,” stated the Unite union, which joined the Labour Party to call for a government investigation into the collapse, according to The Guardian.
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