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FPS Blog: Retention and commercial bad practice – a history lesson

The recent collapse into liquidation of Carillion has direct and continuing consequences for employees, specialist contractors, suppliers, organisations, and the UK government. Every day brings new revelations regarding mismanagement.

Martin Blower

Martin Blower is a past chairman of the Federation of Piling Specialists and managing director of Bauer Technologies

While shocking and life changing for all those caught in its wake, the fiasco is both a timely wake up call and a call to action for the construction industry. The opportunity for radical change usually comes once in a generation and this now is our time.

“Business as usual” is not an option for the construction industry. Our prescription for the Carillion sickness is immediate legislation by the government to abolish cash retentions and so called “early payment” schemes.

Much can be attributed to a flawed business model. Specifically, the age-old, and on-going, issue of cash retention and application of fair commercial practices.

The flaws in Carillion’s business model are already well documented: unsustainably low margin bids, using supplier and trade contractor cash to finance unrealistic dividend payments, over declaration of profit on part completed projects to name a just few.

More concerning, Carillion are not alone among tier one contractors. This year, many of the key tier one contractors working in the UK have issued profit warnings and embarked on re-structuring and refocusing exercises. Their use of the term “legacy project” has lost any credibility it may have once had and surely no longer has any value.

The Federation of Piling Specialists (FPS) generally supports the Build UK/CECA Retention Roadmap which calls for government legislation to abolish cash retention no later than 2025. This is a laudable aim but in today’s landscape it is just not radical enough.

The FPS experience suggests that the time for its abolition is now.

The business benefits of providing alternatives to cash retentions is clearly demonstrated by the experience of FPS members. Since the 1980s when similar trading conditions prevailed, FPS members have pursued an consistent approach of supplying clients with alternatives to cash retention. In 2017, the combined annual turnover of FPS members was over £500M. A survey of FPS members showed that a trivial amount held in cash retention has been lost in the Carillion collapse.

As our members contract across all the industry sectors, this demonstrates what can be achieved when resisting cash retentions, even in the current trading landscape.

It’s no wonder that many in the specialist supply chain see legislation on retention trust funds as attractive. For too long tier one contractors through delayed payment, non-payment and unfair certification have abused cash retention. It is next to impossible for specialists to obtain adequate trade debtor insurance against many tier one contractors in the current environment; this means insolvency risk is real and present and it sits with the supply chain.

Adoption of a retention trust as a solution risks making the principle of retention cast in stone in our industry while giving short term relief. Experience of FPS members is that not only is cash retention not required but also it does not solve the rectification of defects issue that it is supposedly meant to do. The Carillion debacle exposes this as a myth.

However, abuse of cash retention is just one part of the Carillion problem. By far a larger problem is the operation of so called early payment schemes. You will remember that Carillion operated a 120 day payment cycle with its supply chain. Suppliers were then invited to improve on these payment terms by subscribing to a scheme arranged with Carillion’s bankers to facilitate earlier payments.

Maybe I’m just old fashioned but it’s certainly stretching my understanding of early payment to agree that 90 day, 75 day, 60 day, or 45 day payments are in any way early. It is in this area that many in the supply chain have been caught out.

The timing of the liquidation, the certification cycle and the amount of high value and high profile rail work done over the Christmas and New Year period have led to significant losses in the supply chain. The FPS calls for the government and its agencies to require their tier one contractors to publicly commit to the immediate withdrawal of any similar early payment and legislate against such schemes at the earliest opportunity.

To ensure that government fully recognises the issues facing the construction industry, the FPS will continue its lobbying efforts regarding immediate legislation to abolish cash retentions and the withdrawal of so called early payment schemes.

Let’s face it, the demise of Carillion is not only sad for the construction sector, it is also a warning of what could be on the horizon with many other companies if the issues are not addressed and addressed soon.

  • Martin Blower is a past chairman of the Federation of Piling Specialists and managing director of Bauer Technologies

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