Blog

The collapse of a giant: the impact on our supply chain

20/05/2019

The collapse of Carillion rocked the industry, highlighting the importance of treating our supply chains ethically.

At the time of the collapse the outsourcing giant held 420 public sector contracts, employed 3,000 people and owed 30,000 suppliers an estimated £1.2bn. The financial implications for hard-working people were huge. Not only for those working directly or indirectly for Carillion itself, but with Carillion operating 13 final salary pension schemes, it impacted the livelihoods of 12,000 members who were already claiming a pension.

Our latest research, ‘After Carillion – The Future of Outsourcing’, explores what construction suppliers and the public think about the collapse and whether the model of public outsourcing is robust enough to adequately support and protect our supply chain.

Small and Medium Sized Enterprises (SMEs) are the bedrock of the construction sector. According to the latest government business population estimates, there are just under one million SMEs in the construction industry, who make up a fifth of all SMEs in the UK. The contribution these businesses make to the local and national economy are huge and shouldn’t be underestimated. But as an industry, we are failing to offer these small businesses the support, security and assurances they need to operate in a sustainable manner that enables growth and prosperity.

Payment terms at Carillion were being stretched to 120 days, with the decision to set terms at four months an interpretation of two flagship government payment initiatives introduced under David Cameron. At the time of the collapse, many suppliers were uninsured against the risk. These businesses will never recoup their share of the £1.2bn loss.

Our frameworks uphold ‘Fair Payment’ commitments as we believe companies have the right to receive correct full payment when it is due. It is impossible for small companies to function effectively when cash flow is not guaranteed.

Company directors need to pay their staff, purchase equipment and cover operational overheads and all contracts should have payment periods that do not exceed 30 days

Mark Robinson
Chief Executive, Scape Group

82 per cent of the suppliers we spoke to believe the payment terms of reputable framework providers offer them more protection than those that were offered by Carillion.

Build UK recently published a series of recommendations for the industry to encourage a fairer allocation of risk through the supply chain, highlighting the importance of continuous improvement of industry best practice and collaboration, to help protect our supply chain.

The suppliers we spoke to recognise the opportunities that frameworks provide in terms of upskilling the workforce, sharing skills and expertise and building strong working relationships that support a pipeline of work. Three-quarters of SMEs think their team has more opportunities to develop and learn by working on projects with reputable framework providers while 93 per cent think it benefits the professional standing of their organisation.

Carillion’s collapse highlighted the vulnerability of the supply chain, but it also exposed the potentially cosy relationship between Carillion and its auditors. It shone a light on how the Financial Reporting Council’s lack of interrogation into questionable financial information, enabled the true extent of Carillion’s finances to be concealed.

Carillion was a huge failure in corporate regulation, allowing the outsourcer to become a giant, and unsustainable business. The government accepted bids that were priced too low without taking a holistic view of the submissions.

Lessons learned demonstrate that a contractor’s ability to deliver social value and community benefits should be considered as well as cost.

Mark Robinson
Chief Executive, Scape Group

Carillion’s suppliers were treated poorly; unfair payment terms meant that the company’s collapse had devastating consequences that were felt throughout the supply chain. 99.9% of all private sector businesses are SMEs and they account for 60% of all private sector employment.

We cannot afford to treat our suppliers poorly, and they cannot afford for us to do so either.

Written by:

Mark Robinson

Group Chief Executive
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