Following emergency talks with the government ending up without a rescue deal being agreed, Carillion, the second largest construction firm in the UK, was placed into administration.
The key issues known to us at this time are:
- Insufficient margins to cover project overruns, with speculation that it took on too many risky contracts that proved unprofitable
- Payment delays in the Middle East hit its accounts, together with a reliance on bank borrowing to continue trading
- A pension deficit of £587m adding to the company risk rating
In light of the above, the banks were reluctant to lend Carillion more money unless they could get guarantees from the government, the contractor’s biggest client. However, as these talks failed the company was placed into administration.
Sub-contractor concern
Whilst the public sector work is likely to continue in some form, the private contracts are very much at immediate risk. It is estimated that Carillion engaged the services of 7,000 subcontractors and the impact on this supply chain will be significant.
A common problem within the construction sector is an over-reliance on a single customer and many companies will have relied upon Carillion for a majority of their revenue. With payments now at risk and staff, suppliers and funders still needing to be paid, it is likely that many sub-contractors will experience cash flow issues of varying severity.
Those affected should submit their claims to Carillion liquidators as soon as possible, confirm the status of their current work (since not all Carillion projects will simply stop) and review their options for funding or raising finance if their cash flow position requires it to continue trading.
The construction industry, has in the past, been notoriously challenging to secure finance, with the banks varying appetite for lending. In response to the collapse of Carillion, the government has set up a task force aimed at supporting small businesses and workers affected. The group is chaired by Business Secretary Greg Clark and includes representatives from business, trade unions, construction trade associations and lenders. Meanwhile, three banks have said they will provide money to support small business customers who are struggling after the failure of Carillion. Lloyds is creating a £50m fund, while RBS is offering £75m worth of assistance and HSBC £100m.
Work to be redistributed?
Whilst the collapse is worrying news for many, a positive that the industry can take is that it was not triggered by a change in market demand or project availability.
Therefore, for construction firms and sub-contractors to safeguard their own businesses they can look within to how they are managing costs, cash flow and project profit margins.
The projects which Carillion were engaged will still need to be concluded and therefore it may open up opportunities for others large firms to pick up the vacant projects. Some sub-contractors may also find they are able to build new relationships with whomever adopts the contracts.
Key learning points to take from this:
What can construction firms and sub-contractors do to mitigate this eventuality? There is no simple answer and all circumstances will be different; however, we would suggest considering the following points:
- Have a plan B – In any project unexpected events can crop up, wreaking havoc on even the best budgeting and plans. Make sure that your profit margin allows for these eventualities. Winning profitable work is key.
- Set budgets and controls – These can be broken down and itemised. The key will be to encourage your whole team to think more about how they can help the business drive down costs.
- Chase payments – Have processes in place to chase overdue payments. If you are billing upfront this will help you promptly to begin jobs, and if you are billing throughout projects this will reduce the cashflow strain on your business. Consider your payment terms, track invoices and send reminders before the payment due date. Also consider email billing and reminders, if you don’t already, to increase speed.
- Talk to your accountant – By monitoring and controlling your costs and key performance indicators it will put you in a better position when making business decisions.
Download our Construction Benchmarking Report
How do your costs and profit margin compare to others in the industry? Find out by downloading our Construction Benchmarking Report.
Alternatively, find out more about our accounting and tax services for construction firms here.
Specialising in the construction sector, David is an advisor to large joint venture projects and residential / commercial developers.