Carillion’s collapse had tsunami effect on the supply chain

The Government must learn from Carillion by enforcing fair payment and opening up public sector contracts to smaller firms, according to the Federation of Master Builders (FMB).

Commenting on the joint report on Carillion from the Work and Pensions and Business, Energy and Industrial Strategy Select Committees, Brian Berry, chief executive of the FMB, said: “It’s the small firms in Carillion’s supply chain that bore the brunt of the giant’s demise earlier this year. The government now has a unique opportunity to completely change how it works with the private sector. For too long, many large firms have reigned supreme and walked all over their supply chains. MPs are right to note that “measures that government has taken to improve the business environment, such as the Prompt Payment Code, have proved wholly ineffective.” As a signatory of the government’s Prompt Payment Code, Carillion should have paid 95% of invoices within 60 days. However, Carillion enforced standard payment terms of 120 days to its suppliers and we know of FMB members that have had to wait for more than 200 days to be paid by major contractors. A company that was so flagrantly breaking the rules should not have been rewarded by the government with juicy contract after juicy contract.”

Berry continued: “The collapse of Carillion created a ‘domino effect’ among sub-contractors. We know of firms that have lost more than £200,000 since the collapse and of others that were so reliant on Carillion contracts, they’ve gone out of business entirely. Once a company at the top of a chain goes under it creates a ripple effect. In this instance, however, the ripple has been more like a tsunami because of the extent to which the government relied on this single company. At present, there is nothing in place to ensure another Carillion doesn’t happen again.”

Berry concluded: “This report is welcome, but we now want to see root-and-branch reform in terms of how the government procures from the private sector. The government should exclude suppliers from major government procurements if they do not demonstrate fair, effective and responsible payment practices. The government should also end retentions abuse by ensuring that retentions are held in a deposit scheme. Finally, the government must also make greater efforts to work directly with small firms by breaking larger contracts down into smaller lots. That way, not only will the government spread its risk, it will also reap the benefits that come from procuring a greater proportion of its work from a broad range of small companies. Small companies reinvest profits into the local economy and in construction, small firms train two thirds of all apprentices. Ensuring SMEs win a higher proportion of public sector contracts makes sense on every level.”