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Carillion liquidation raises supply chain fears

Building services bodies demand clear action on retentions and payment protections in response Government commits to cover costs of company’s public-sector contracts

The construction industry has reacted to Carillion’s liquidation today by calling for further government commitments to guarantee prompt and transparent payment mechanisms for contractors.

The company today declared insolvency with the government stepping in to fund work on the company’s ongoing public-sector contracts.

The Cabinet Office requested that all the company’s staff come to work on Monday and has guaranteed pay for staff on public sector projects. Carillion is estimated to have held 450 public sector contracts in the areas of education, health and social care, transport and justice services.

A Cabinet Office statement stated that the public sector contracts, which represented 38 per cent of Carillion’s revenue in 2016, were “not the cause of the company’s present financial difficulties.”

Industry warning

BESA and the ECA have warned that the liquidation could be catastrophic for the building services industry, adding further weight to their campaign to push for new regulations around cash retentions.

BESA has also outlined a number of commitments it hopes to see implemented to ensure prompt payment of contractors for work they have completed, as well as guaranteeing that funds held as retentions will be returned.

The association said: “According to its latest set of accounts, Carillion was holding over £800m in retentions payments owed to sub-contractors. There is growing alarm that much of this money will be lost leaving many more firms at risk of financial collapse.”

MP Peter Aldous last week introduced a new bill to parliament, devised with support from BESA and the ECA and backed by a number of other trade associations, that would mandate use of third party deposit schemes to hold cash retentions. As opposed to an outright end to retentions, the bill, which will now have a second hearing in April, is hoped to prevent the loss of monies owed to construction groups and contractors as a result of upstream insolvencies.

BESA president Tim Hopkinson said that the bill’s introduction was intended to help alleviate supply chain pressures such as those represented by the liquidation of a major UK construction group.

He said, “We are aware of the frantic attempts going on behind the scenes to rescue Carillion’s projects and switch them to other contractors, but unless retention money is protected – there is a danger that the problem is just being moved to another place and that SMEs will remain equally vulnerable.”

BESA and the ECA have called for government backing of a five-point plan to protect the wider supply chain. This includes guaranteeing SME contractors will be able to continue their work on ongoing projects started by Carillion with guaranteed payment, as well as active support for the retention bill introduced by Peter Aldous.

The organisations have also called for a block on awarding any further contracts to major public-sector suppliers such as Carillion without guarantees of prompt supply chain payments.

Other calls include government enforcement of 30-day payments in the construction supply chain as opposed to 126-day payment terms used by Carillion.

Finally, BESA and the ECA have called for transparent supply-chain payment systems in the public sector with statutory requirements that mandate use of project bank accounts for all future major work and no retentions and no retentions.

Uncertain future

The government has said that the Official Receiver has been appointed as liquidator for Carillion, while partners at PwC will serve as ‘special managers’. The Cabinet Office has also committed to provide the Official Receiver with “necessary funding” required to maintain public services moving forward.

The Insolvency Service has said that all Carillion staff were asked to turn up for work with individual departments covering the costs of projects. However, it added that the future for private sector contracts would be down to the contractors involved, with discussions now expected to commence on validity of future work.

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