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Carillion collapse adds urgency to retentions issue

The liquidation of construction giant Carillion could lead to potentially catastrophic losses for thousands of SMEs, according to the Building Engineering Services Association (BESA) and the electrotechnical and engineering services trade body ECA.

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.

Peter Aldous, MP for Waveney and longstanding champion of SMEs in industry, introduced a draft Bill to Parliament just last week, which seeks to amend the 1996 Construction Act to ensure retention money is held in a deposit protection scheme – avoiding precisely this kind of situation.

“The Bill was developed precisely with just this kind of nightmare scenario in mind,” said BESA President Tim Hopkinson. “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.”

“Carillion’s move into liquidation places their huge supply chain – which includes many electrical and other specialist contractors - at risk of losing millions of pounds, which will threaten companies and jobs”, commented ECA Director of Business Paul Reeve. “While this is a clear and present disaster for construction and wider maintenance, the question will ultimately follow, why did Carillion appear so attractive to clients even as they moved towards collapse?”

BESA and ECA are calling for the following five-point action plan:

  • Any SME contractors already working on Carillion projects should be allowed to continue on these projects and be paid directly.
  • The UK Government must actively support the Peter Aldous Bill on retentions and ensure it is allocated enough Parliamentary time to progress.
  • Major public sector suppliers like Carillion should be precluded from winning any further contracts unless it can prove it pays its supply chain promptly.
  • Major corporate public sector suppliers like Carillion, worthy of their own Government account managers and who rely on SME supply-chains for successful delivery, must be made to implement transparent supply-chain payment systems, statutory public sector payment requirements, Project Bank Accounts and no retentions, throughout the supply chain.
  • Government must monitor and enforce the public sector 30-day payment supply chain model as opposed to Carillion’s own 126-day payment terms, which leaves thousands of SMEs struggling for cash flow to pay staff and suppliers.

Given that 99 percent of the industry’s 280,000 businesses are SMEs, we would also ask that Paul Uppal, small business commissioner, supports this plan.

The Bill, which has attracted widespread cross-party support, highlights the fact that more than £10.5bn of SME’s potential working capital is locked up in retentions every year and £700m was entirely lost to SMEs over the past three years.

“Well run businesses are being starved of vital working capital and put at risk of insolvency through no fault of their own,” added Mr Hopkinson. “It is time for the abuse of the retentions system to end and for sub-contractors’ hard earned money to be protected from this kind of supply chain failure.”

The average UK contractor has £27,500 withheld per year in retentions and, under the terms of the ‘Aldous Bill’ this money would be protected in the event of an insolvency somewhere else in the supply chain.

Mr Reeve concluded: “The fact that a company who recently worked on prestigious public contracts such as Crossrail and the Olympic Stadium can be in this situation should be a wake-up call to those procuring major public infrastructure work.”

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