If one of the larger construction companies were to fail, the consequences for small and medium sized enterprises (SMEs) and their supply chains could be disastrous,” Peter Aldous MP said as he introduced the Construction Retention Schemes bill to the House of Commons on 9 January.
Just a few days later on 15 January, the UK’s second largest construction company, Carillion, filed for compulsory liquidation. The collapse came nine months after it’s finances were given a clean bill of health by KPMG, which audited the accounts as it has done since the company was established 19 years ago. The construction and services business was £1.5bn in debt, employed 19,500 workers in the UK and was involved in 450 public contracts.
Jobs lost and jobs saved
As New Civil Engineer went to press, the Official Receiver confirmed that 930 Carillion staff have been made redundant. More than 1,200 more jobs have been safeguarded on infrastructure, construction, central government and local government contracts. Firms in the supply chain, many of which had already reported issues of late payments in the months before the collapse, have been left struggling without the anticipated income from their contracts with Carillion.
Industry figures say the full impact on the supply chain has not yet become apparent. The extent of the damage could take months to come to light as the effects of the collapse trickle down the tiers of suppliers.
“The early signs are that a lot of the distress we thought would arise immediately upon Carillion’s demise has not materialised,” says Specialist Engineering Contractors Group chief executive Rudi Klein. However, he warns that the full effects have yet to be felt and could result in hundreds of insolvencies.
Government defends decisions
The government has defended its decision to keep handing Carillion public contracts after a July profit warning triggered a 70% drop in the company’s share price. It said it only awarded the struggling company work as part of joint ventures, including work on High Speed 2 (HS2), to mitigate against potential failure.
In the days after the collapse companies in JV with Carillion announced they would take over the contacts. Kier confirmed that it would step in to replace Carillion on its HS2 joint venture with Eiffage and on all Highways England jobs where it was in JV with the failed contractor.
Lincolnshire County Council ended its contract with Carillion to build the £96M Lincoln Eastern Bypass, and Galliford Try temporarily stepped in until a permanent replacement was found.
Carillion was one of four contractors on the £1.5bn A14 Cambridge to Huntingdon improvement project and was also in a JV with Galliford Try and Balfour Beatty on the £550M Aberdeen Western Peripheral Route contract.
Short term support from banks was recognised by industry figures as being efficient and flexible, but there are concerns that as the situation plays out it will be harder to protect smaller businesses further down the supply chain.
Supply chain impact
A spokesman for the Federation of Small Businesses says: “We actually think we will probably never know the specific number [of businesses affected] because it may be that you get so far down the supply chain that someone who a business supplies isn’t paying them, but they don’t realise that three or four steps up the chain is Carillion.”
“If they [a small business] haven’t got a piece of paper that proves they directly had a contract with Carillion, could they still go to their bank and say, ‘it’s our customers, customers, customer that was Carillion’?” he adds. Civil Engineering Contractors Association (Ceca) chief executive Alasdair Reisner says, “If the tier two gets into trouble, does that have an effect on tier three?”.
One way to protect businesses further down the chain would be for clients and contractors to continue to work with suppliers that had already been given work by Carillion, Soady says.
It is risky putting so many public contracts in the hands of so few giants like Carillion
After the short-term issues caused by the collapse are resolved, there has to be a “radical way of restructuring the industry,” says Association for Consultancy & Engineering chief executive Nelson Ogunshakin.
“We need leadership from industry players, clients and the suppliers, and to say: ‘how do we make our industry sustainable?’ Because right now it’s questionable”, he says.
Klein adds: “The Carillion disease could spread and that, to me, is a really big worry at the moment. The banks are going to be looking very carefully at the balance sheets of other companies.”
Experts point to wide-ranging issues that must be addressed if the industry is to change repeatedly referencing procurement and payment.
Facing up to problems
“Now is the time for our industry to face up to the problems our traditional approach to delivery and contracting has created, and to make a change,” says Anglian Water director Dale Evans. Evans, as chair of the Infrastructure Client Group is leading Project 13, the ICE-led initiative to move the industry’s business model away from payment for volume of work done towards payment on outcomes achieved (see p28).
“The construction industry’s poor track record for productivity and reliability is unarguably behind other sectors. The recent collapse of Carillion, which has seen thousands of jobs and a number of major infrastructure projects put at risk, has shone a light on the health of contracting generally and demonstrated that our current delivery model is unsustainable,” says Evans.
“We need to accept that it [the procurement process] is broken,” Ogunshakin adds.
Same firms get all the jobs
Too many contracts go to the same large companies, adds FSB’s Soady. “It is risky putting so many public contracts in the hands of so few, giants like Carillion, because clearly it can go bust and the ramifications can be huge…It should be easier for smaller businesses to apply for public contacts,” he explains. He suggests that big contracts are broken down and offered individually as separate, smaller contracts to make it easier for SMEs to bid for them. He also calls for the procurement process to be made simpler.
Carillion had delayed payments to smaller suppliers by several months, the FSB said in a statement at the time of the company’s collapse.
The organisation wrote to Carillion in July about late payment and said that its members had waited up to three months to be paid.
“If it had been very unusual for that kind of thing [late payments] to happen, then alarm bells would have started ringing about the state of Carillion’s finances, but they weren’t really because so many businesses treat their suppliers that way,” Soady says.
One solution to the late payment problem, and one that is backed by most trade associations is to use project bank accounts.
Another solution to protect the supply chain is the Construction Retention Protection Scheme that was launched in Parliament a few days before Carillion fell into liquidation.
In the aftermath of the collapse, Build UK, Ceca and the Construction Products Association (CPA) urged the government to abolish retention payments. Carillion held an estimated £800M in retentions when it went into liquidation, according to the various trade bodies.
CPA chief executive Diana Montgomery says: “The issue of retention is part of a larger issue of the reform required around construction procurement and delivery, which recent events have thrown in to stark relief.”