Warning signs

Martin Blower talks retention and commercial bad practice
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Martin Blower

UK construction giant Carillion's recent collapse into liquidation has direct and continuing consequences for employees, specialist contractors, suppliers, organisations and the UK government. Every day brings new revelations regarding mismanagement. While shocking and life changing for all those caught in its wake, the fiasco is both a timely wake-up call and a call to action for the construction industry. The opportunity for radical change usually comes once in a generation and this now is our time. ‘Business as usual' is not an option for the construction industry. The action we require is immediate legislation by UK government to abolish cash retentions and so called ‘early payment' schemes.

The apparent flaws in Carillion's business model are already well documented: unsustainably low margin bids, using supplier and trade contractor cash to finance unrealistic dividend payments, over declaration of profit on part-completed projects to name a just few. More concerning, Carillion is not alone among Tier 1 contractors. This year, many of the key Tier 1 contractors working in the UK have issued profit warnings and embarked on restructuring and refocusing exercises. Their use of the term ‘legacy project' as the cause of their difficulties has lost all credibility and is surely more indicative of wider change that is required in the industry.

The Federation of Piling Specialists (FPS) generally supports the Build UK/CECA ‘Retention Roadmap', which calls for government legislation to abolish cash retention, but it is disappointed that the timescale for achieving this is "no later than 2025". In today's landscape, it is just not radical enough. The recent experience of many subcontractors in the wake of the Carillion demise suggests that the time for its abolition is now, and the experience of the FPS members demonstrates that this is achievable. Since the 1980s, when similar trading conditions prevailed, FPS members have pursued a consistent approach of supplying clients with alternatives to cash retention, and they have been successful in achieving this. In 2017, the combined annual turnover of FPS members was over £500 million (US$699 million). A survey of FPS members showed that they had successfully avoided the potentially crippling impact of Carillion going into liquidation owing them significant amounts of retained cash.

As our members contract across all the industry sectors, this demonstrates what can be achieved when resisting cash retentions, even in the current trading landscape.

For too long many Tier 1 contractors have abused cash retention to hold on to money that should have been paid to the subcontractors. It is next to impossible for specialists to obtain adequate trade debtor insurance against many Tier 1 contractors in the current environment; this means insolvency risk is real and present, and it sits with the supply chain. There has been talk about the adoption of a retention trust as a solution, but this risks making the principle of retention ‘cast in stone' in our industry, and we fundamentally object to this approach.

However, abuse of cash retention is just one part of the Carillion problem. Carillion was at the forefront of the operation of a so called ‘early payment' scheme. You will remember that Carillion operated a 120-day payment cycle with its supply chain, who were then invited to improve on these payment terms by subscribing (at a cost) to a scheme arranged with Carillion's bankers to facilitate earlier payments. Maybe I'm just old fashioned, but it's certainly stretching my understanding of early payment to agree that 90 day, 75 day, 60 day or 45 day payments are in any way ‘early', let alone for the supply chain to be required to pay for the privilege.

The timing of the liquidation, the certification cycle and the amount of high-value and high-profile rail work done over the Christmas and New Year period have led to significant losses in the supply chain. The FPS calls for the UK government and its agencies to require their Tier 1 contractors to publicly commit to the immediate withdrawal of any similar ‘early' payment scheme and legislate against such schemes at the earliest opportunity.

To ensure that government fully recognises the issues facing the construction industry, the FPS will continue its lobbying efforts regarding immediate legislation to abolish cash retentions and the withdrawal of so called ‘early payment' schemes.

Let's face it, the demise of Carillion is not only sad for the construction sector, it is also a warning of what could be on the horizon for other companies if the issues are not addressed and addressed soon.

Martin Blower is the past chair of the Federation of Piling Specialists (FPS)


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