The ripples from the Carillion collapse will reach far and wide. It’s reported around 30,000 companies are owed £1 Billion by Carillion. For many these are precarious times. It’s possible some suppliers, further down the supply chain, may not realise they’ve been working for Carillion. Whether you’re directly or indirectly exposed, this is a wake up call for us all, to ensure our businesses are healthy and our commercial contracts, systems and processes are robust.
Carillion
Carillion was the UK’s second biggest construction, and facilities management company, and a major service provider to the government has gone into liquidation with a £900m debt and £600m pension deficit. Their business model used a network of suppliers and sub contractors. In turn these suppliers often used other sub contractors for specific work on projects. The supply chain can be extremely long, from the larger first tier suppliers to small independent contractors at the other end. It’s therefore possible, some far down the supply chain didn’t know they were supplying Carillon.
The many suppliers owed money by Carillon are unlikely to see any of the debt repaid. A lot of these are small businesses, who having already waited the 120 days payment terms of Carillon, are not going to get paid. Small businesses are owed, by Carillion, on average £141,000, according to a survey of building, engineering and electrical firms by industry bodies. Medium sized ones, with 50 to 250 employees, are reportedly owed an average of £236,000, while on average larger companies face a shortfall of over £15m.
The size of Carillion, the amount of Government projects and involvement in the firm, made many suppliers feel protected. If a company the size of Carillon can can collapse then anyone can. This is a wake up call for many, and shows the need to review our business practices, processes and contracts to ensure protection from similar problems.
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A successful business should be greater than the sum of its parts. Regular, and objective, reviews help identify issues before they become a major threat, keeping your business healthy and nurturing growth.
Carillion
An estimated £31 Million is expected to be paid out by trade credit insurance firms, to help businesses in Carillion’s supply chain recover from their collapse. Trade credit insurance covers firms against the risk of not being paid for goods or services provided, following insolvency, protracted default or political upheaval. According to the BBC, sums ranging from £5,000 to several million pounds are being paid to those insured against bad debts. Only a minority of companies in Carillion’s supply chain had this cover, most of the other suppliers risk getting little or nothing back.
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Business experts have warned of the “domino effect” of the Carillion’s liquidation, which could see further insolvencies in the next three to six months, as others in the supply chain are affected. The liquidators state that “All agents, subcontractors and suppliers should continue to work and provide goods and services as normal, under their existing contracts, terms and conditions. You will get paid for goods and services you supply from January 15, 2018.” There’s no mention of funds due prior to this date, which will cause major problems for business, in the supply chain, who are relying on that money to pay their own creditors and employees.
Carillion | What can we learn
The fall out from Carillions collapse could have ramifications for those not directly connected. Through poor cash flow of those within Carillion’s supply chain, who may owe companies outside of it, to those who seek replacement business, muscling in on contracts they wouldn’t have looked at before. Now is the time to review your business and market place and understand how you could be affected.
It is essential, for those affected by the Carillion liquidation to assess their situation quickly. Ensure you make immediate claims to the liquidator and closely monitor how the liquidation is proceeding. Check with your bank and creditors to see if there’s any flexibility on your payments and reduce costs where possible. If you can’t continue financially seek advice now, it may be possible to arrange a Company Voluntary Arrangement (CVA), as a recovery mechanism for profitable companies to recover from an individual bad debt.
Check your contracts, you may be able to suspend or terminate your contract with your customer. You should also see what your options are with anyone that you are sub contracting to. Your contracts may specifically set out what happens if one of the parties in the supply chain becomes insolvent.
If your contract doesn’t cover this, take steps to retrieve money owed to you, through legal means or withholding future work on the project until you’re paid. If you decide to take action, make sure you do it legally and within the terms of the contract.
There are many lessons to be learnt from Carillion’s collapse. For contractors, these events should encourage a business review. Firstly on how you enter into contracts and secondly your effectiveness of managing programmes and your record keeping. Whether directly affected or not, you should review your contracts, systems and processes. The Effectiveness of your processes, and the records you keep, are essential to protect yourself in the event disputes or situations, such as liquidation, that lead to non-payment. When things go wrong, these can be the difference between getting paid or losing everything.