Will Carillion’s collapse spark the late payment changes we need?

01/02/2018

Carillion’s collapse has left a trail of unpaid bills to thousands of small subcontractors. But could Britain’s biggest corporate failure in a decade spark the late payment changes we need?

The construction and outsourcing company collapsed on 15 January under the weight of at least £2.2 billion in debt and pension liabilities.

As a result many of its 30,000 subcontractors are unlikely to see any money returned, putting thousands of jobs at risk.

This has caused many industry groups and business leaders to speak out on changes that they want to see the government and businesses make to prevent situations like this happening again.

Here we look at some of the issues that have been raised about tackling late payment going forward.

Force businesses to pay on time by law

It has been revealed that Carillion was paying its subcontractors with standard payment terms of 120 days, despite having signed up to the Prompt Payment Code. Now, in the wake of their collapse, thousands of their subcontractors are out of pocket and many may face bankruptcy.

Speaking out on the issue, the small business commissioner warned big companies to start paying their suppliers on time or be forced to by law.

According to the Financial Times, Mr Uppal said that he hopes the late payment problem can be solved by “cultural change rather than legislation”.

But he warned: “Ultimately if I don’t achieve this you are probably going to see legislation. There is a cross-party consensus on this. There is a political will for this to happen.”

The government has already passed regulations which require all big companies to report their payment terms and performance twice a year.

Most will do so for the first time this April. But, of the first 300 that already have reported on their practices, only 30% managed to pay their bills within 30 days on average.

This shows that there is still a long way to go to protect smaller businesses from the poor payment practices of larger companies.

Resolve retentions issues

The Building Engineering Services Association (BESA) and the electrotechnical and engineering services trade body ECA have called on the government to resolve retentions issues in the supply chain.

According to its latest set of accounts, Carillion was holding over £800m in retentions payments owed to sub-contractors. It is feared that much of this money will be lost, putting many businesses at risk of financial collapse.

A Construction Retention Schemes bill was introduced to Parliament last week and is expected to have its second reading in the House of Commons in April.

It aims to amend the 1996 Construction Act to ensure retention money is held in a deposit protection scheme – avoiding just this kind of situation.

BESA and ECA are calling for the government to actively support this bill.

BESA President Tim Hopkinson said: “Well run businesses are being starved of vital working capital and put at risk of insolvency through no fault of their own.

“It is time for the abuse of the retentions system to end and for sub-contractors’ hard earned money to be protected from this kind of supply chain failure.”

Improve the procurement process

In the wake of Carillion’s collapse, the government has faced widespread criticism for continuing to give contracts to the construction firm even though they repeatedly cited cash flow concerns and failed to pay suppliers within a reasonable timeframe.

As a result, experts have demanded an overhaul of the “broken” procurement process and improved security for the supply chain.

Federation of Small Businesses chairman Mike Cherry said: “When the dust settles on this sorry saga, there is also a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses.

“Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the government should prioritise meeting its target of at least

one third of taxpayer-funded contracts going to smaller firms.”

He also urged the Small Business Commissioner, Paul Uppal, to toughen the Prompt Payment Code with a ‘three strikes’ policy so that big firms cannot bid for contracts if they fail to measure up.

Encourage businesses to protect themselves with credit insurance

Lack of protection means that Carillion’s suppliers stand to recover only a tiny proportion of their estimated losses of £1.2 billion from insurers.

The Association of British Insurers (ABI) said that insurers only expect to pay out £31 million in trade credit insurance claims to affected suppliers – just 3% of their estimated losses.

Creditors are only expected to recover between less than one penny and 6.6 pence of every pound they are owed in insolvency proceedings, according to court papers.

Many of these businesses could have protected themselves against this loss by purchasing trade credit insurance. Credit insurance allows businesses to cover the risk of not being paid for the goods and services they provide in case of insolvency or other problems.

Despite the obvious benefits of credit insurance, purchases among small businesses tend to be relatively low, industry specialists said.

However, the devastating impact of Carillion’s collapse may be the catalyst needed to encourage more businesses to take out protection and reduce their risk in situations such as this.

Encourage businesses to improve their internal credit management

In situations like this it is always hoped that businesses will learn from the mistakes made and ensure that they take adequate steps to protect themselves going forward.

Suppliers and subcontractors should analyse their credit control processes to ensure that they are doing all that they can to get paid on time.

When dealing with larger businesses, many of which are notorious for inflicting poor payment practices on small businesses, this can be challenging.

Understandably many small businesses feel that they don’t have much choice but to accept these practices from large companies due to the value of the contract, and the prestige of being associated with such a big brand.

But, if you’re being forced to accept credit terms of 90 or 120 days – plus potential late payment delays – you’re letting those companies put their cash flow needs ahead of your own.

This blog post offers some tips on how to stop big businesses taking advantage of you.

What do you think? Will Carillion’s collapse spark the changes needed to tackle late payment? Let us know in the comments below.