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The red flags along the road to Carillion's collapse

The red flags along the road to Carillion's collapse

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In addition to liberally apportioning blame for the Carillion insolvency, the final report of the enquiry of the Work and Pensions and BEIS Committees also considered how Carillion ran its accounts, and how it interacted with its multi-billion pound supply chain. Scathingly, the Committees concluded that “Despite being signatories of the (government-backed) Prompt Payment Code, Carillion treated suppliers with contempt, enforcing standard payment terms of 120 days. Suppliers could be paid earlier in return for a fee, a wheeze that Carillion used to effectively borrow more, under the radar”.

The report highlights that Carillion relied on its suppliers to provide materials, services and support across its contracts, while serially deploying late payment and the routine and exhaustive quibbling of invoices. Carillion’s ‘pay to be paid more quickly’ scheme (which still meant payment after 45 days, against industry good practice of under 30 days) had opened a line of credit for Carillion. It then used this to systematically shore up its weakening balance sheet - at the expense of the balance sheets of its suppliers. Many of these suppliers were smaller businesses who, given a chance, would normally help to deliver UK growth, employment and investment.

Behind all this, the Select report found that Carillion was accounting for considerable amounts of construction revenue that was ‘traded not certified’. This is revenue that clients had not yet signed off, such as that associated with claims and variations, and where it was inherently uncertain whether payment would actually be received. In December 2016, the company was recognising nearly £300 million of ‘traded not certified’ revenue, an increase of over £60 million since June 2014, and accounting for over 10% of its total revenue from construction contracts.

Carillion, says the report, also had a target of “100% cash conversion” (i.e. any borrowing was listed as money and therefore represented as an asset rather than a liability). It consistently reported that it was meeting this 100% target, because the EPF (Early Payment Facility) classification allowed its cash flow statements to present bank borrowing as cash coming in from its operations, rather than as yet another loan. To meet its 100% target, Carillion needed its activity to be risk free, and to do that, it transferred as much risk as possible to its own supply chain, many of whom were already supplying the company with four months’ cash liquidity due to its long payment terms.

The Committees went on to confirm something that ECA, BESA, SEC Group and many other leading trade bodies had been warning about for years, namely that “Carillion’s business model was an unsustainable dash for cash... The mystery is not that it collapsed, but that it lasted so long.” Rachel Reeves MP, Chair of the BEIS Committee, said: "Carillion’s collapse was a disaster for all those who lost their jobs and the small businesses, contractors and suppliers left fighting for survival.” Worse still, the report concluded “Carillion became a giant and unsustainable corporate time bomb... Carillion could happen again, and soon...”

ECA and the BESA have consistently urged Government to focus on measures that will reduce the scope for making late payments, at source. One impactful early step would be to ban those companies that cannot actively demonstrate a history of prompt and fair payment from tendering for public procurement projects and services. We believe this is an essential part of improving commercial behaviour in relation to late payment and payment abuse.

Rob Driscoll (Solicitor & Mediator) is Deputy Director of Business Policy & Practice at the ECA, and an SME Business Adviser to the Crown/Cabinet Office.

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