The consensus among most of the business community, is failed construction giant Carillion went under owing money to 30,000 small businesses. The saying ‘turnover is vanity, profit is sanity, but cash flow is king’ sums up perfectly the cause of the construction giant’s demise.
But why, despite its huge order book, did Carillion go under? Big infrastructure construction projects require financing. Typically for short term, large scale projects, construction financing is usually obtained through banks and private investors. Municipal projects may seek bond underwriting or, increasingly, alternative financing companies.
Carillion folded with an estimated £900 million debt pile and an estimated £2 billion pension deficit. Most of its debt will be loans to financial institutions. Getting paid on time is key to maintaining the cash flow required to service these loans. But with major projects like the £350m Midland Metropolitan Hospital in Sandwell, the £335m Royal Liverpool Hospital and the £745m Aberdeen bypass, running many months behind schedule; Carillion did not have the money to pay its creditors. To add insult to injury it was battling to secure payment for a major project in the Middle East. And the pundits are reporting that the company readily took on risky, unprofitable projects, with scant regard to sensible business practice.
Now it is in liquidation, sadly many of the small sub-contractors who were so reliant on its business are facing ruin. Guidance issued by the Federation of Small Businesses on liquidation spells out that most of the estimated 30,000 small businesses effected by Carillion’s collapse are legally classified as unsecured creditors. Sadly, for them its secured creditors (the banks), the liquidator, employees, pensioners and companies holding any charge over an asset will get paid first in that order. Given Carillion’s financial position it is highly unlikely its unsecured creditors will get paid.
A Parliament Early Day Motion tabled in January this year by MPs states: “This House believes that small businesses must not be punished for the misdeeds of a failed large company; notes that the collapse of Carillion highlights the payment abuse suffered by sub-contractors engaged in the delivery of public contracts for a prime contractor.”
It also calls on the Government to honour all outstanding payments on public contracts for work completed; further calls on the Government to protect local economies and jobs by ensuring redistributed contracts remain with SMEs; calls on the Government to take action to enforce public sector 30-day payment regulations with consequences including the disqualification of those that do not comply from winning public contracts; and calls on the Government to introduce new legislative proposals to place construction retentions into secure and independently held deposit protection schemes and tougher measures to limit borrowing against public contracts. So far it has the support of around 50 MPs.
The issues around the way SME contractors are so poorly treated by large prime contractors are not new. While the Carillion debacle has served to highlight the problems, for the 30,000 SME contractors facing potential ruin, their stable door has been firmly slammed and the horse is long gone!
Brian Berry, the CEO of the Federation of Master Builders, says: “Carillion’s liquidation raises serious questions for the Government, not least about its over-reliance on major contractors. The Government needs to open public sector construction contracts to small and micro firms by breaking larger contracts down into smaller lots. That way, it can spread its risk while also reaping the benefits that come from procuring a greater proportion of its work from a broad range of small companies. Construction SMEs train two-thirds of all apprentices and are a sure-fire way of spreading economic growth more evenly throughout the UK.”
At Ground & Water, we wholeheartedly agree.