It’s fair to say that Carillion’s “relentless dash for cash” and “exploitation of suppliers” have left a cloud over British business, and now the fall-out must force a change in the way future supply chains are managed.
For a long time now, thousands of Small and Medium Sized Businesses (SMEs) in the construction supply chain have faced a Hobson’s choice in working with large contractors.
For many it is simply put up and shut up, or risk losing work. In fact, our research found that over half (56 per cent) of subcontractors feel they’re unable to influence or negotiate contracts at the risk of losing business.
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.”
Subcontractors undoubtedly need main contractors to deliver a flow of work and to create opportunities, but we must not ignore the fact that main contractors are also reliant on dozens of subcontractors to deliver projects and provide valuable skills. Conservative estimates suggest that around 30,000 businesses were operating in Carillion’s supply chain when it collapsed.
However, this quest for profit at the expense of the businesses fulfilling contracts has left a lasting stain on the industry. Late payments of up to 120 days and subcontractors losing £16,000 per year on average due to bad debt, means that many businesses are simply surviving from day-to-day. These may seem small sums, but when added up, can mean the difference between a business being able to invest in new staff or purchasing vital equipment. For smaller businesses, it can even mean the difference between survival and insolvency.
Now that the full scale of the problem is laid bare, we need to tackle the chronic issues that affect SMEs working throughout the sector. However, Carillion needs to be the wake-up call for concrete action to help SMEs across all industries.
It’s for this reason that we would welcome mandatory payment terms for public sector suppliers, a move supported by over four in five subcontractors we spoke to in our Subcontracting Growth study. We also call upon the government to make sure that steps are taken to develop better public reporting of supply chains, a measure backed by over two-thirds of small firms.
We welcome progress already made in establishing the Small Business Commissioner and would urge that further powers are granted to tackle late payment. Carillion has already shown that other regulators such as the FRC and the Pensions Regulator were unable to act – it’s vital that the Small Business Commissioner isn’t found to be the same position in five years’ time.