More than a year after the collapse of U.K. construction giant Carillion, the case continues to make headlines. Most recently, the U.K.’s Insolvency Service began fresh questioning of top Carillion executives as part of a broader investigation into the company and its B2B payment practices.
The case pointed a spotlight on the construction industry’s struggles with timely vendor payments, and the financial consequences that delayed and late payments can have not only on a supplier base, but also on the corporate customer. In the wake of Carillion’s insolvency, tens of thousands of suppliers have faced uncertainty over whether they will ever be compensated for the firm’s outstanding invoices.
Experts say it’s a lesson in cash flow management, supplier relationship strategy and, according to some, the need for regulatory action to address the late payments challenge.
However, BBC reports on Monday (April 22) said the collapse of yet another construction company, Dawnus, has once again revealed the construction supply chain’s fragility, and could signal that the industry has failed to learn from past lessons.
The Welsh company collapsed in March, according to BBC reports, causing a near immediate upheaval in the company’s supply chain.
“Nearly all the work carried out by Dawnus was outsourced to [small businesses], which will now bear the brunt of the losses from insolvency,” said Catherine Griffiths-Williams, national executive officer speaking on behalf of SEC Group Wales/Cymru in earlier reports in PBC Today. “Again, this highlights the financial fragility of the large construction firms and the consequent risks to their sub-contractors, which could now lose millions of pounds.”
She added that “the impact on the Welsh economy could be very damaging.”
Since January 2018, the Welsh government has has a policy in place that requires all public construction projects worth more than $2.6 million to disburse payouts to subcontractors from project bank accounts (PBAs), the BBC said. Rather than paying large companies and then relying on them to disburse payments, all players in the supply chain are paid from the PBA.
However, some say the policy does not go far enough, particularly to protect smaller players. According to reports, the Federation of Master Builders is calling on regulators to expand that mandate to cover projects below the $2.6 million threshold.
“We are monitoring the effectiveness of the policy and will consider any proposals to improve upon it, including revising the current [$2.6 million] threshold,” a spokesperson for the government said.
Supply Chain Fears
Short of that mandate, many smaller players in the construction space are left to their own devices when a company like Dawnus or Carillion falls into administration.
But industry players say that payment uncertainty plagues construction supply chains, even when these companies remain in operation.
“You never know when the money is going to come through,” said Lloyd Harding, technical director of security installation provider Protectorcomms, in an interview with the BBC. “It’s 60 days, end of the month at best. Potentially it can be 90 days and 120 days.”
He told reporters that Legsun, one of Dawnus’ subsidiaries and the unit that is in administration, were “notoriously bad payers, which is not that rare in this end of the industry.”
Harding said his company is now owed nearly $40,000 from Legsun, but does not expect to see that payment.
“Poor payment practices amongst many large construction firms are rife,” said FBM Welsh director Ifan Glyn in another interview. “Project bank accounts have the potential to curb some of that behavior, but currently it’s only Welsh government projects over the value of [$2.6 million] when they are mandated.”
While Dawnus’ collapse could look at the demise of Carillion for guidance on how to protect smaller players in the supply chain, some subcontractors acknowledge they probably won’t be paid. Glyn noted the hope that Dawnus could act as an example for the next administration scenario in the U.K. construction sector.
“Lessons will hopefully be learnt from the collapse of Dawnus, but we’ll be seeing over the next year or so how effective PBAs are,” he told the BBC.