Or does it? In April last year we looked at the impact of the collapse of Carillion after 90 days, but how has the situation changed after another 9 months?
It was on 15th January 2018 that the news of the compulsory liquidation of Carillion Plc (and a number of its group companies) hit the headlines. The days that followed saw many ponder how exactly the UK’s second largest construction and services company with over 40,000 employees worldwide and over £5bn total revenues could suddenly fail.
By the time of the liquidation, Carillion owed £1.3bn in senior debt, had a pension deficit of over £600m and owed its supply chain £1.5bn. Understandably, suppliers who had significant revenues tied up in Carillion contracts or those working almost exclusively for Carillion were hit the hardest. In the immediate aftermath a number of companies filed for insolvency citing the failure of Carillion as the cause.
According to data published by Dun & Bradstreet in November 2018, the number of insolvencies in the construction sector has doubled in the two years from Q3 2016. Of course Carillion would not have been the sole cause of this increase, historically low margins of around 2% or less is another factor that has seen the sector under strain over the last year. Pressure on margins is largely down to the fall in the value of the pound, Brexit, and increases in the minimum wage which mean the cost of materials and labour is rising whilst employers continue to push for a decrease in the cost of projects.
Given the scale of the supply chain of the construction giant, one may argue that the full effect of the failure has not yet been felt and so further insolvencies are likely to follow. Moreover, according to a recent survey by RICS in Q4 2018, the expectation is for margins to continue to fall in 2019 and for the financial position of the construction industry to worsen even more. According to data published by Construction News in November 2018, lending to the construction sector has fallen by over 11% since January 2015 which suggests a lack of available funding to the sector. This increase in difficulty in obtaining finance will further hamper the growth of businesses in the sector.
However, there are calls for reforms to construction payment terms and the manner in which tenders are awarded in order to ensure that supply chains can survive in an environment of rising costs and lower demand. Unfortunately, given the current state of the sector and continued requirement for reform, it is more likely than not that we will see another Carillion-size failure in the near future.
Unsecured creditors are always the most at risk in any supply chain, but a trade credit insurance policy is one way of ensuring that you are not left with outstanding debts in the event of the insolvency or default of a customer. In fact, in the event of an insolvency of an insured buyer, the claim process is triggered straight away so you don’t even need to wait until payment terms have expired before starting the claims process and claims are usually paid within 30 days. This safety net can vastly improve cash flow and help to protect the profitability and liquidity of your own business. Why not request a credit insurance quote or contact us for more information?