The demise of Carillion has had a profound impact on its supply chain through what may be concluded to be persistent late payment or non-payment practices.
While government investigations seek to apportion most of the blame for Carillion’s demise, and the subsequent impact on its suppliers, at the doors of its directors, managers and advisers – some commentators may place at least some of the blame on the supply chain itself.
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Could the supply chain have protected itself better by making sure that cashflow – or the lack of it – was managed better? The Construction Act and the Late Payment of Commercial Debts (Interest) Act includes measures to enforce payment and discourage late payment. Or do fair payment charters and project bank accounts offer a better way forward?
While the use of project bank accounts may have made a difference to Carillion’s fortunes, it is debatable whether they would have made much difference. Successive governments have sought to drive the construction industry to lower and lower costs with the consequent downward pressure on margins.
More on project bank accounts
To combat this downward pressure, tier one contractors find that getting cash in as soon as possible from their clients and holding on to it for as long as possible makes a significant contribution to their bottom line.
Extensive use of project bank accounts would probably deny tier one contractors the opportunity to generate profit by using cash in such a way. If they had been widely used on Carillion contracts, the company’s collapse may well have occurred sooner, but there would have been some security of payment for its subcontractors.
For the system to work, clients may need to accept that margins must rise for tier one and tier two contractors who are parties to a contract’s project bank account.
But what if some firms in the supply chain are not covered by the project bank account? They may be unwilling or fearful of relying on their statutory rights under the Construction Act and late payment legislation, and for these companies a different remedy may be needed.
The retail sector is regulated by the Groceries Supply Code of Practice, the purpose of which is to ensure that the UK’s largest supermarkets – with groceries turnover exceeding £1bn – treat their direct suppliers fairly.
The Groceries Code Adjudicator has the power to undertake investigations, make recommendations and impose a financial penalty up to 1% of relevant turnover. Tesco was investigated and found in 2016 to have breached the code.
Maybe it is time for the government to introduce a similar code for the construction industry – but covering all suppliers. A construction supply chain code of practice, and a construction code adjudicator to enforce it, may ensure that all companies supplying services on a construction contract are treated fairly.
Wayne Lord is a barrister and senior lecturer in construction law at Loughborough University
