The domino effect of the Carillion collapse

"There is still an oppourtunity to do more to level the playing field between subcontractors and the larger businesses with which they work"

The recent collapse of Carillion has been discussed widely in the UK media due to the far-reaching effects it’s having on the construction industry, not to mention the broad range of other services it also supplied, including building railways, army bases and hospitals, providing meals to school children, maintaining libraries and delivering broadband. Carillion’s fall will have ripples on the British economy for decades, particularly as 43,000 jobs were put at risk when the company was put into liquidation.

Of course, an issue so significant to the British economy will always bring challenges to Ireland too. In June, Kildare based Sammon Contracting Group also went into liquidation as a result of Carillion’s collapse and plans for a number of badly needed national schools are on hold as a result.

When companies fail, the media often reflect on the impact on the customers and employees. One group who often neglected is that of sub-contractors, who rely on larger firms to supply them with work but who don’t have any comeback when a business closes and are often left out of pocket, sometimes to the tune of tens of thousands. Bibby Financial Services Global Business Monitor 2017 reports that the average amount of bad debt Irish SME’s suffer each year is almost €14,000. It’s reasonable to assume that this figure is fitting for subcontractors also.

Subcontractors across Ireland and the UK have naturally become more cautious of working with large scale construction companies as a result. Half of subcontractors working within the UK construction sector are wary of working with main contractors, following the collapse of Carillion, according to a recent study by Bibby Financial Services (BFS). Findings of the Subcontracting Growth study reveal a shift in attitudes towards working within the supply chains of large construction firms, following the Wolverhampton-based giant’s liquidation in January.

Almost half of UK subcontractors surveyed (47%) say that it has made them cautious of working with large contractors, and the same proportion now has concerns over the financial stability of similar firms.

The research also shows the prospect of a main contractor going into administration is the second greatest threat to subcontractors over the next twelve months, behind late payment. It is clear that January’s news has sent repercussions throughout the sector and subcontractors working within the supply chain of large main contractors have serious concerns about others suffering a similar fate.

It’s now vital that both public and private sector organisations work together to support the sector’s SMEs at this pivotal time. This needs to happen in Ireland too and the Government should introduce measures to prevent similar supply-chain collapses in the future.  The National Treasury Management Agency (NTMA) are already taking steps to address the procurement process since the Carillion collapse, including looking at setting up a list of public-sector service suppliers, to help avoid the State becoming too exposed to individual firms. However, there is still an opportunity to do more to level the playing field between sub-contractors and the larger businesses with which they work. Only when this is achieved will the construction sector reach its full economic potential.

Four-fifths (82%) of the UK subcontractors surveyed say they support mandatory payment terms for public sector suppliers and more than two-thirds (69%) believe there should be better public reporting of supply chains. Furthermore, 59 per cent of firms say that Project Bank Accounts - ring-fenced accounts ensuring that all parties in the supply chain are paid on time – should be mandatory. Findings of the study highlight this power imbalance. More than half (56%) say they must accept onerous contract terms of large customers or face losing work, and 44 per cent say that contracts are difficult to understand. Just six per cent say they seek professional support when negotiating contracts.

The research shows that some subcontractors have acted to protect their businesses following Carillion’s collapse. A fifth of firms (19%) say they have evaluated their cashflow position, and 16 per cent say they have reviewed existing agreements with main contractors. However, two-thirds (66%) are yet to take any action. In Ireland, we saw protests at schools in Wicklow and Kildare earlier this week. Small construction firms often have Hobson’s choice. They must either accept the burdensome contract terms outlined or lose contracts and vital revenue. Very rarely can they influence the terms of these agreements, and this often leads to disputes and even insolvency further down the line.

Until the government put a plan in place, subcontractors are on their own, and need to ensure that they have protected themselves against bad debt – Bad debt can occur for a number of reasons, from insolvency in the supply chain, to protracted default or dispute and the issue is particularly challenging for smaller firms who may have already paid for raw material and labour costs. This places a massive strain on these businesses, sometimes even causing viable firms to fold. For many, bad debt is the hidden cost of doing business.

Published in the Sunday Business Post July 29, 2018

Mark O'Rourke is managing director with Bibby Financial Services Ireland, which is provides financial support and funding to Irish SMEs. Planning for Growth is a regular study conducted by Critical Research on behalf of Bibby Financial Services.  Fieldwork for the 2018 study ran between April 9 and 30 among owners and deciosn-makers of 250 UK subcontractors.

29 July 2018

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