Next steps for Carillion’s supply chain
Carillion has been in the news for some time, but this week it was announced they were going into liquidation will mean that suppliers will be facing some very tough decisions. Whilst Carillion is an enormous business it does not do much of the work itself. The work it does is mainly subcontracted out and the suppliers are paid on longer terms than which it gets paid, which allows it to generate cash. However, when the cash being generated does not cover loss making contracts, and the banks and shareholders are unwilling to put more money in to trade it out of the situation, the result is that it collapses, as it has done.
Carillion had two main work streams, private sector work and public-sector work. How these are dealt with will be different as the needs of the end clients are different. Firstly, consider the public-sector work in prisons, schools and hospitals. These services must continue for the social fabric of the country to survive. Politicians will not see them fail. Probably, the liquidator will take over the running of these contracts and will arrange for the client (i.e. the government department) to pay the suppliers direct. So, what should a supplier do? There are several considerations, firstly they should recognise that the period from when they were last paid by Carillion and when the newly instructed works start is at risk. There is unlikely to be enough money in the pot at the end to get much back – if any. This will be a loss they have to bear. The good news is that payments going forward will be direct from the government department, so there is a ready pipeline. However, these new contracts will undoubtedly be retendered at some stage and you should be mindful of this. At this stage the suppliers have the strongest hand to negotiate if they can survive the earlier missing payments as they have the resources to give continuity of service. As time goes on, their strength of hand will diminish, as the work will be out for retender.
For suppliers working on the private sector jobs the continuity of service is not in the public eye. How the individual clients deal with the collapse of their main contractor will be different. Projects in the early stages will probably stop and the second-place tenderer asked to step in. This saves the time and cost of retendering. Second and third tier suppliers may get a look in on this, they might not. But just as above they will miss out on the period between when they were last paid, and any new work being contracted. Where projects are in the latter stages, clients might consider engaging a project manager to manage the project, in the place of Carillion to complete the project and the project become effectively a construction management project, where the client pays the suppliers direct. There will be a period of negotiation before re-commencing and everyone will be looking at how much it will cost for them not to continue. For a private client, losing their main contractor is going to be costly.
In summary what should suppliers of Carillion do?
- Make sure your records are up to date so that your claim can be processed properly by the Official Receiver
- Find out from the Liquidator or the client how they are considering to continue the project or service
- Consider how the loss of payments between your last payment and any recommencement will affect your business.
- If the liquidator or Client asks you to continue – negotiate and ensure there is a new contract in place
- Tighten up on cash collection of your other clients and speak to your bank, you are going to suffer some payment loss
- Take steps to match your outgoings to your expected income with your revised pipeline from the negotiation.
- Act as soon as you can, to get your overhead in sync with your projected pipeline.
Taking decisive action to cut costs is a tough call for SME’s, they may not have done it before. It is however the only way to have a chance of surviving the loss of payments. They should also be willing to negotiate with the Carillion’s client, or their appointed agent, as Carillion’s clients are going to suffer because of any delay to their project. At times like this strong leadership is called for to secure the least damage for those involved.
Every situation will be different, suppliers should seek professional advice to clarify their circumstance.
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