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Carillion collapse: the fallout



By Maeve England – Partner – Construction & Dispute Resolution

News that the UK’s second biggest construction company had entered liquidation broke this week, as it collapsed under its £1.5bn debt. But with the company now under Official Receiver control – due to the company’s high number of Government contracts – what does the fallout mean for businesses, employees and the Government?

Businesses

For an industry largely based of SMEs, the liquidation of Carillion could have severe consequences within the construction sector as invoices go unpaid. One of the businesses to first announce how the collapse would affect it was Galliford Try, which estimates it could lose up to £40m.

For smaller organisations, where late payments can significantly disrupt cashflow, the impact could have dire consequences. This comes after revelations that Carillion has unpaid invoices dating back several months, as highlighted by The Federation of Small Businesses national chairman, Mike Cherry, who said, “It is vital that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion’s own employees. These unpaid bills may well go back several months.”

Employees

Within the UK 20,000 people are employed by Carillion across the construction, maintenance and cleaning industries, who will now be facing complete uncertainty about their futures. Added to this, due to subcontracting of work the Unite union believes that there are also thousands more jobs at risk in the construction supply chain.

Although the Government urged employees working on public sector contracts to go into work stating that it would foot the bill, for others all that can be done is to wait and see what happens, with unions and industry bodies calling for the Government to act.

Another pressing concern for employees will be the £587m shortfall in the Carillion pension scheme. However, the Pension Protection Fund has reassured members that their benefits are protected and that they will continue to work toward the best possible outcome for members. Unfortunately, this is another situation where “only time will tell” as the story continues to unfold.

The Government

The Government is expected to announce that it will be taking back all public sector contracts in-house. But for private sector projects, the news has come with significant expense – with HS2 expected to cost banks up to £2bn.

Local impacts are also likely to be felt, as Carillion is contracted to provide maintenance and cleaning services to prisons, Network Rail and 50,000 homes for the Ministry of Defence. One of its clients, Oxfordshire County Council, has already acknowledged that it was planning for this exact eventuality and has resource ready to take over Carillion’s school meals contract should it need to.

One of the most pressing questions that will need to be answered over the coming months is why the Government continued to award the company public sector contracts despite its three profit warnings. This could lead to the Government reviewing its own practices, as it has already been highlighted that the government is too reliant on a select handful of large suppliers – potentially paving the way for new opportunities for SMEs, offering a glimmer of hope in a difficult situation.

But amidst calls for a public inquiry, the Government will need to explain how this unfortunate situation came about – with both businesses and employees awaiting answers.