Since the collapse of Carillion on 15 January 2018, there have been questions raised over the financial stability of supply chains throughout the construction sector. In a damning Parliamentary report published on 16 May, it was concluded that Carillion’s business model was “an unsustainable dash for cash” and that its collapse was less surprising than its ability to continue trading for so long.
At the time of its liquidation, Carillion was the UK’s second largest construction company and it is estimated that there were up to 30,000 businesses in its supply chain. Furthermore, there were more than 200 government bodies arranging contracts with the Wolverhampton-based main contractor, highlighting its economic significance.
According to Creditsafe, the number of corporate insolvencies in the construction sector increased by 73 per cent in the first quarter of the year, quantifying the extent of the issue.
The situation has proved as a warning sign to public and private sector organisations alike, not least to the tens of thousands of subcontractors operating throughout the country.
Yet Carillion was not the only issue faced by the sector in the first quarter of the year. Heavy snowfall from the ‘Beast from the East’ halted work and disrupted activity. In particular, March’s unseasonal weather paused civil engineering activity, which caused the Markit/CIPS UK construction Purchasing Managers Index to slump to its lowest level since the EU Referendum vote.
Notwithstanding a tumultuous start to 2018, the sector has rebounded to some extent. Continued demand for housing and commercial space, shovels hitting the ground on HS2, and a series of other major infrastructure projects have ensured that there is light at the end of the tunnel.
But it is critical that lessons are learnt from the sector’s troubled first half and that perennial issues are tackled head-on. The most pressing of such is the power imbalance between construction sector SMEs and subcontractors, and the main contractors with which they serve. It is no secret that many businesses working within these supply chains wait for up to 120 days for payment, but many feel helpless to take action. Summarising the problem in a House of Commons Select Committee in April, Small Business Commissioner, Paul Uppal explained that many businesses would “rather have a very, very bad commercial relationship than none at all.”
While late payment continues to hinder the sector’s output, there are wider issues holding back subcontractors. Public sector procurement, contract
negotiation and bad debt are all areas where subcontractors and small businesses operating within the sector need both support and guidance.
Working with construction industry specialists, The Vinden Partnership, throughout April, we surveyed 250 UK subcontractors across a variety of trades. Our Subcontracting Growth research paints a unique picture of the sector, how the collapse of Carillion – and Brexit – are impacting the sector, and the environment in which small construction businesses operate today.
Findings included in our report provide food for thought for policy makers, main contractors, wider service providers and – above all else – UK subcontractors at this pivotal time for the industry.
Managing Director – Construction Finance
Bibby Financial Services
To download the full Subcontracting Growth 2018 report, visit: https://www.bibbyfinancialservices.com/about-us/news-and-insights/reports/2018/subcontracting-growth-report.