On 15th January 2018, construction giant Carillion went into compulsory liquidation.  At the time of liquidation, Carillion were managing in the region of 420 UK public sector contracts and had debts of £1.5 billion.  This resulted in thousands of job losses and left the general public questioning how such a large company could collapse in this way?

Why did Carillion collapse?

As a construction specialist, Carillion were best known for their work in the public sector.  One of the UK’s largest public sector service suppliers, they were heavily involved in the HS2 project, had maintenance contracts for 50,000 MOD (Ministry of Defence) properties and managed almost 900 schools and a selection of prisons and major road networks.

So how could a company of such standing collapse so spectacularly?  Investigations have found that a reckless style of management, a business model based on greed, relentless expansion and supplier exploitation, inadequate pension funding, and a continued obsession – even in the face of imminent liquidation – of protecting large executive bonuses, ultimately resulted in Carillion’s collapse.

How long payment terms devastated suppliers

When Carillion collapsed, thousands of jobs were lost both inside the company and in its 30,000 SME suppliers.  Many of these supplier job losses could have been avoided were it not for the unpaid invoices which Carillion had amassed due to their 120 day payment terms.  In 2012, the UK government launched the Supply Chain Finance Scheme which was designed to protect SMEs in case of financial instability.

When the scheme was being set up, Carillion were consulted as part of the process.  Unfortunately, Carillion endorsed the scheme then subtly altered its focus from Supply Chain Finance to Early Payment Facility.  This meant that their suppliers had to take on debt in order to receive payment on time.  As soon as Carillion introduced the 120 day payment terms, they were able to bolster their own finances at the expense of their supplier’s assets.

Could the collapse have been avoided?

The fact that Carillion went into compulsory liquidation instead of a process of administration illustrates the company’s dire financial situation.  Even after in-depth discussions with the government and its financial lenders, all parties were unable to agree a rescue deal.  When the board of Directors first became aware of the company’s financial problems, they could have sought specialist advice to avoid the company’s collapse.

It appears that Carillion’s senior management took on a series of cheap and readily available finance packages to ‘plaster over’ poor performance in the belief that the financial crisis and economic uncertainty would be a temporary situation.  When the UK economy did not recover, as predicted, the company had amassed too much debt for a business turnaround to be possible.

What should we consider when approaching future construction contracts?

For anyone working in the construction industry, it’s imperative to ensure that your client is financially stable.  Whether you are a supplier of services or materials for a main contractor or you’re involved in staffing and project management within the construction industry, the following questions can help you to avoid financial loss and safeguard against insolvency:

  • Ask for the most recent company account audit and credit score
  • Find out the annual turnover compared to the cost of the project and look for any shortcomings
  • Check payment history in relation to suppliers
  • Analyse business history – it’s a good idea to work with a company with a solid trading history with year on year growth
  • For long term projects create a framework agreement to ensure that both parties are subject to a minimum standard of service provision
  • Try to understand as much about the company as possible – from the Directors to any project sub-contractors – financial instability can have a direct impact on your company

If we have learnt anything from Carillion’s collapse, it is that there must be more transparency between government funding programmes and how they are used by large corporations and their impact on SMEs.  To avoid a similar situation in the future, new legislation is essential to ensure that prompt payment is a legal obligation for all main contractors.  In this age of instant digital payments, there is never a need for invoices to be delayed unless a company’s finances are unstable.

If you work in the construction industry, an experienced recruitment company can help to connect reliable and solvent companies with skilled and experienced workers.  At PPR Recruitment, we do just that.   Whether you’re a construction company looking for staffing solutions for your latest project or you’re a construction worker seeking your next placement, PPR can help.  To find out about our latest opportunities or register a vacancy with us, call 01895 808188 or contact us online .