Up to 30,000 businesses are predicted to lose money as a result of the collapse of Carillion. According to the Electrical Contractors’ Association, £2 billion is owed to suppliers. Most if not all of that money will never be repaid because of the debts, which Carillion had racked up.
Last month, engineering contractor, Vaughan went into administration. Vaughan, was owed hundreds of thousands of pounds by Carillion, and is unlikely to be the last casualty of the Carillion fiasco.
Carillion extended its payment terms to 120 days in August last year. But government contractors are supposed to pay their suppliers within 30 days.
It is clear that public contract terms were not enforced by the government and the consequences have been dire for the businesses affected.
The next Labour government will enforce the 30 day payment rule and also include late payment as a category of ‘risky behaviour’ in public contracts, which will allow the government to remove contracts from offending companies. We will also introduce a system of binding arbitration and fines for persistent late payments, similar to the approach taken in Australia.
And there are other ways to look after smaller firms in construction. Project Bank Accounts are already used by Highways England and in the devolved administrations in the UK. They ensure payment on time and also give protection in insolvencies like that of Carillion. This is because contract monies are paid into a trust rather than to the main contractor. PBAs also mean that the money is ringfenced for suppliers in the event of insolvency and are a way of reducing administration costs because they remove the need to chase late payment or to use invoice financing to help sub-contractors with cashflow.
PBAs are also a way of addressing one of the bug bears in the construction industry. Cash retentions.
Retentions are a proportion of a contract payment, typically 5 or 10% withheld to ensure that minor defects are corrected by sub-contractors. But in the construction industry, retentions are little more than a way to help the cashflow of larger firms at the expense of smaller suppliers. This was described to me by my constituent, Steve Murray, who runs a highways lighting contractor. Steve showed me files going back several years, where he has not been paid retentions and the SEC Group estimates that £3 billion is owed at any one time in retentions held by main contractors.
And of course if the main contractor goes bust, the retentions are lost just like any other outstanding debt.
If everything is paid through Project Bank Accounts, retentions, like other payments can be held in trust and paid in a timely fashion.
Late payment, retention abuse, lack of protections for unsecured creditors upon insolvency and the status of public construction projections upon insolvency are all major problems, highlighted by Carillion’s failure.
Already, concerns have been raised about Interserve and the impact on suppliers of the way other major public sector contracts are being run.
It is time to introduce a fairer contracting system and to replace the reckless speculation which blights the way that public construction contracts have been run.