Fallout of Carillion: What it Means to Subcontractors

March 28, 2018

If you’re a construction professional in the UK, you will no doubt be aware of – and might well have felt the effects of – the collapse of Carillion. When the facilities management and construction services company went into liquidation in January of this year, the message got around quickly.

The private firm was one of the biggest suppliers of public sector construction services and was involved in numerous high-profile jobs. These included the High Speed Two rail project and building, repair and management contracts in the UK’s schools, NHS facilities and prison system.

Job losses at Carillion

By the first week of March, it was reported that there had been nearly 1,500 redundancies within Carillion itself. Around 7,500 employees were still retained by the firm as it continued to deliver certain services pending decisions to cease or move contracts and their futures remain uncertain. There was some good news, however, in the fact that 8,216 jobs had been saved via the transfer of their contracts to new firms.

The effect on Carillion’s employees is important of course, but it only tells part of the story. When a major contractor goes bust on this scale, it has an inevitable knock-on effect that can have a serious impact on subcontractors and others in the supply chain. There’s a very real risk, in fact, of seeing many of these subcontractors going into liquidation alongside the main contractor.

The ripple effect for subcontractors

Carillion was involved in some huge construction projects and service contracts, so the company’s collapse was always going to have a major ripple effect on subcontractors.

A straw poll by the Building Engineering Services Association (BESA) and Electrical Contractors Association (ECA) in the wake of the collapse suggested that engineering subcontractors were exposed to an outstanding £375,000 of work at the time of the announcement of Carillion’s liquidation.

As the news of Carillion’s liquidation broke in January Brian Berry, Chief Executive of the Federation of Master Builders (FMB), said: “Carillion’s liquidation is terrible news for all those who work for the company and it will have serious knock-on effects for the many smaller firms in its supply chain, some of which will be in serious financial danger as a result of Carillion’s demise.”

Some of the businesses affected will have been subcontractors carrying out work on Carillion projects that suddenly found themselves seriously out of pocket. Beyond this, suppliers of building materials, equipment, personnel and even less obvious products and services such as specialist software would also have been affected.

A straw poll by the Building Engineering Services Association (BESA) and Electrical Contractors Association (ECA) in the wake of the collapse suggested that engineering subcontractors were exposed to an outstanding £375,000 of work at the time of the announcement of Carillion’s liquidation.

Large businesses with 250-plus employees were owed an average of £15.6m each. Medium-sized businesses (50-249 employees) were owed on average £236,000, although the single most exposed firm in the poll was owed close to £1.4 million. Small businesses (10-49 employees) were owed an average of £141,000, with one owed around £800,000. Micro-businesses with fewer than ten employees were owed an average of £98,000, although the hardest-hit micro-business spoken to by BESA and ECA was owed more than £250,000.

Calls for the government to overhaul contractor policies

Mr Berry of the FMB called for an overhaul of the way the government awards its contracts, saying: “Carillion’s liquidation raises serious questions for the Government, not least about its over-reliance on major contractors. The Government needs to open up 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.”

That might help prevent such an awful situation from occurring again in the future, but it is little consolation for those already affected by Carillion’s collapse. It’s also the case that not every major contractor is heavily involved in the public sector.

The collapse of a main contractor can be devastating for many of the businesses around it, from the employers to subcontractors and suppliers. It isn’t always possible to avoid the effects completely, but it’s important that subcontractors do whatever they can to minimise their losses.

So is there anything that subcontractors can do to protect themselves from a major contractor?

How subcontractors can protect themselves

If affected, subcontractors should seek professional help immediately. It may be possible to make ‘Time to Pay’ arrangements with HMRC. This can potentially give some breathing room at least in terms of tax payments owed, which could also help with general cash flow issues.

Subcontractors and other parties are still likely to take substantial hits, but there are also a number of contractual elements that might be useful. These could include:

The collapse of a main contractor can be devastating for many of the businesses around it, from the employers to subcontractors and suppliers. It isn’t always possible to avoid the effects completely, but it’s important that subcontractors do whatever they can to minimise their losses.

  • Payments by employers
    Some sub-contracts can allow for direct payments from the employer to the subcontractor should the main contractor in the middle become insolvent. However, these can fall foul of insolvency laws, as the funds that are available should be distributed equally to creditors in the case of insolvency. Project Bank Accounts (PBAs) are ring-fenced accounts that serve as a channel for payment on construction projects to ensure that contractors, key subcontractors and key supply chain members of the are paid on contractually agreed dates. Again, this could potentially see the subcontractor paid directly by the employer.
  • Retention of title
    A retention of title (ROT) clause is a provision that means the seller keeps legal ownership of any goods until certain obligations are met, which usually means full payment. This can be tricky in the construction industry however if, for example, materials have already been used in the building process or mixed up with materials from other sources.
  • Termination clauses
    Subcontract clauses could allow sub-contractors to stop work or terminate the sub-contract when a main contractor becomes insolvent. Subcontractors already have the right to suspend work due to repeated late payments under the Housing Grants, Construction and Regeneration Act 1996, but it can be useful to have the conditions for doing so spelt out in the contract.
  • ‘Pay when paid’ clauses
    Subcontractors could build ‘pay when paid’ clauses into their own subcontracts, so that they only pay their own subcontractors when paid by the main contractor. This can contribute to the knock-on effect further down the line however and does not apply when the main contractor does not pay but is not actually insolvent.

The collapse of a main contractor can be devastating for many of the businesses around it, from the employers to subcontractors and suppliers. It isn’t always possible to avoid the effects completely, but it’s important that subcontractors do whatever they can to minimise their losses.

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