36. Carillion relied on an extensive network of suppliers to deliver materials, services and support across its work.150 At the point of the company's collapse, the construction trade body Build UK estimated that Carillion's supply chain spanned 30,000 companies.151 These businesses included direct subcontractors, indirect subcontractors, and suppliers who may have been unaware that they formed part of Carillion's supply chain until the insolvency prevented them from receiving payments owed. The Federation of Small Business (FSB) said that small suppliers had been placed in a "perilous" situation.152 The jeopardy suppliers faced at the hands of Carillion was not, however, limited to the point when the company ceased trading. We heard that the company had long been abusing its dominant market position by making small suppliers wait for payment.153 Suppliers told us that Carillion subjected them to extended delays across reporting periods and was notable for quibbling with invoices to avoid prompt payment.154
37. Carillion signed the Government's Prompt Payment Code in 2013.155 Signatories are expected to pay suppliers on time, give clear guidance to suppliers and encourage good practice. They should pay 95% of invoices within 60 days unless there are exceptional circumstances,156 undertake to work towards 30 day payment terms, and avoid practices that adversely affect the supply chain.157
38. Despite signing the Code, Carillion had a reputation as a notorious late payer.158 In 2016, the FSB protested to the company on behalf of suppliers waiting up to 126 days to receive the payments they were owed.159 The Rt Hon Greg Clark MP, Secretary of State for Business, Energy and Industrial Strategy, said that "it is obvious that those payment terms were too long".160 Carillion's former directors were, however, either unaware of the use of this business practice, or unwilling to admit to it. Richard Adam, Richard Howson and Philip Green all claimed not to recognise cases of people waiting 120 to 126 days for payment.161 Emma Mercer, Carillion's final Finance Director, told us of "a few outliers" of "about five per cent" of the supply chain were paid over 120 days and "less than ten per cent" waited 60 days.162
39. Emma Mercer's evidence exhibited greater frankness than Carillion's other former directors. While she accepted that suppliers were asked to sign up to 120 day payment terms, she explained that the company offered an early payment facility (EPF) option.163 She called this practice "supply chain factoring", which is also known as "reverse factoring" or "supply chain financing". In such an arrangement, suppliers can receive payments from a bank ahead of standard timescales, at a discounted rate. Supply chain financing has won support from industry bodies, including the FSB, and Government. In 2012, the then Prime Minister announced the Supply Chain Finance Scheme as an "innovative way for large companies to help their supply chain access credit, improve cash-flow and at a much lower cost".164 Carillion was a founding participant in this well-intentioned initiative.
40. Carillion's use of supply chain finance was unusual in both the harshness of the alternative standard payment terms and the extent to which the company relied on it. Shortly after the launch of the Supply Chain Finance Scheme, Carillion changed its standard payment terms to 120 days.165 Suppliers could sell their invoices at a discount to Carillion's bank to receive their payment after 45 days. Carillion, however, would not be expected to reimburse the bank until the standard payment terms had expired, providing them with a generous repayment period. Emma Mercer told us that this was a deliberate strategy: Carillion explicitly used its EPF to avoid "damaging our working capital" and because it was vulnerable to its own customers not paying within 45 days.166 This only serves to highlight the fragility of Carillion's business model.
Box 2: Vaughan Engineering
| The collapse of Carillion will inevitably have a ripple effect through the UK construction industry and the wider economy. One of the first companies to be hit was Vaughan Engineering Ltd, which filed for administration on 28 March 2018.167 The company employed around 200 people and provided mechanical and electrical building services on large commercial building projects. They had worked extensively with Carillion over the past decade.168 Vaughan Engineering described Carillion's collapse as the principal factor in their own downfall, though they also cited contract disputes with other contractors and inadequate Government support following Carillion's insolvency.169 Their complaints against Carillion echo those of other suppliers who had to deal with them: standard payment terms of 120 days that could only be circumvented by use of the early payment facility, delays in the certification of payments and unsubstantiated counter claims. The company believe they were owed £830,000 by Carillion, which left them unable to cover their liabilities.170 |
41. At the point the company collapsed, Carillion had access to credit of up to £500 million for the "early" payment of suppliers, and was drawing around £350 million.171 That Carillion was using supply chain financing to prop itself up would be of grave concern to investors. But S&P Global, a credit ratings agency, told us that "the lack of transparency concerning Carillion's reverse factoring practices likely obscured its weak balance sheet and cash flow position."172 The accounting impact of this approach is considered later in this report. In the dying days of the company, Carillion considered a proposal by its restructuring consultants, EY, to extend standard payment terms to 126 days as an untapped "cash generative opportunity".173
42. Carillion relied on its suppliers to provide materials, services and support across its contracts, but treated them with contempt. Late payments, the routine quibbling of invoices, and extended delays across reporting periods were company policy. Carillion was a signatory of the Government's Prompt Payment Code, but its standard payment terms were an extraordinary 120 days. Suppliers could be paid in 45 days, but had to take a cut for the privilege. This arrangement opened a line of credit for Carillion, which it used systematically to shore up its fragile balance sheet, without a care for the balance sheets of its suppliers.
43. We welcome that as part of Carillion's insolvency, the Official Receiver has sought to improve payment terms for goods and services provided during and for the benefit of the liquidation. They have reduced terms to "there or thereabouts, within 30 days of invoice rather than the 120 days that [we] have heard".174This does not, however, benefit those suppliers who remain unpaid for goods and services before the collapse of the company. The vast majority of those were uninsured and have joined the long list of creditors unlikely to see anything they were owed.175
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150 The Construction Index, Top 100 construction companies 2017, accessed 22 April 2018
151 BuildUK, Mitigating Impact of Carillion's Liquidation, accessed 22 April 2018
152 Letter from FSB to the Chairs, 31 January 2018
153 Letter from FSB to the Chairs, 31 January 2018
154 Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018; we also received confidential information from other Carillion suppliers on payment delays.
155 Letter from FSB to the Chairs, 31 January 2018
156 The Government and Chartered Institute of Credit Management do not set criteria for exceptional circumstance, but suggest the example of instances where a company is able to demonstrate that they apply different terms to the benefit of their smaller suppliers.
157 Department for Business, Energy and Industrial Strategy and Chartered Institute of Credit Management, Prompt Payment Code, accessed 24 April 2018
158 Letter from FSB to the Chairs, 31 January 2018
159 As above.
160 Q1236 [Greg Clark]
161 Q546 [Richard Howson]; Q547 [Richard Adam]; Q548 [Philip Green]
162 Qq356-8 [Emma Mercer]
163 Qq352-3 [Emma Mercer]
164 'Prime Minister announces Supply Chain Finance Scheme' Prime Minister's Office, 23 October 2012
165 Carillion was still expected to pay within 30 days on its public sector contracts.
166 Qq354-5 [Emma Mercer]
167 BBC News, Former Carillion sub-contractor in administration, accessed 27 April 2018
168 Letter from Vaughan Engineering Ltd to the Chair, 30 March 2018
169 As above.
170 As above.
171 Carillion plc, Group short term cash flow forecast, 22 December 2017 (not published)
172 Letter from S&P Global to the Chairs, 23 March 2018
173 Carillion plc, Weekly reporting pack for week ending 26 November Actuals, 8 December 2017 (not published)
174 Q1380 [David Kelly]
175 "Most UK suppliers uninsured against Carillion's collapse", Daily Telegraph, 25 January 2018