The lessons to be learnt from the collapse of Carillion

When an event such as Carillion happens it emphasises the need to have tight control of your own cash flow so that you can minimise the damage to your business.

With the government seemingly refusing to bail Carillion out, it shows that no matter how large the company and the brand, whether it supports government projects or not, protection of your cash flow remains solely your responsibility.

Carillion may or may not be up to date with its payment cycles (we do not know) but if not, and suppliers have been working ‘in good faith’ for a time, these suppliers may feel the effects of Carillion’s insolvency more harshly than others as their exposure is likely to cover a longer period of time. In our experience, many suppliers do not take advantage of the protections afforded by their contract and legislation to protect themselves from delayed payment/supply chain insolvency for (understandably) fear of damaging the commercial relationship and in some cases cost and time.

There is a fine balance to be struck on any project between maintaining the commercial relationship for the current project, and hopefully future projects, and protecting your cash flow (and your business) and not ‘funding’ your employer’s project through money you have not been paid. In cases of Carillion, applying those protections appropriately could save thousands of pounds, and possibly your business.

The Construction Act

The Housing Grants, Construction and Regeneration Act 1996 (as amended) (‘Construction Act’) provides a mechanism for you to have better control over your cash flow in most construction and engineering projects. The appropriate terms of the Construction Act are either implied into your contract or your written contract should follow the rules required by the Construction Act; either way, it offers you some protection.

Through effective administration of your contract (via the use of Payment Notices and Default Notices) you could put yourself in a position to suspend works for non-payment so that you minimise the amounts you are spending every week keeping your staff, equipment and materials on site and be in a position to adjudicate for unpaid sums; both giving you some control and comfort.

Rarely does a party want to suspend work and/or become involved in a dispute but if you have not protected yourself and your employer becomes insolvent, such as Carillion, or there is an insolvency event in the supply chain above you and you have not been paid, the alternative may not be particularly appealing either.