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HVAC industry fears ‘catastrophic’ domino effect from Carillion failure

Trade bodies welcome early talks with finance sector to get clarity on supply chain finances, but industry still concerned about lack of support for unsecured creditors

Uncertainty remains over the future financial stability of a significant number of SMEs and contractors in Carillion’s supply chain following yesterday’s announcement of the liquidation of the construction and services giant.

Trade organisations from across the construction sector have met with secretary of state for business, energy and industrial strategy (BEIS) Greg Clark in an attempt to try and limit the impacts of Carillion’s collapse – the first of what could prove to be a series of ongoing meetings.

The talks, which involved supply chain groups such as BESA, the Construction Products Association (CPA), BuildUK, and the ECA, were designed to outline what the government has so far done to try and prevent a domino effect from the collapse impacting both large and small service providers and contractors down the supply chain.

Those close to the talks believe that it remains too early in the discussions to have any details on payments to unsecured creditors and for contractors in the supply chain. But there are already fears that a lack of clear support for suppliers and sub-contractors impacted by the Carillion failure will result in a longer-term loss of capability and specialist building expertise.

With construction jobs requiring the input of an average 70 contractors across multiple management tiers, building services experts warned that the impacts could be “catastrophic” with skilled organisations forced out of business permanently. The sub-contractors workforce for Carillion on both its private and public sector contracts are believed to be most at risk of not getting paid.

The government announced that it would be stepping in to fund public sector contracts that had been awarded to the company, estimated to total around 450 agreements, with payments made from the Official Receiver, which has been appointed as liquidator. The outlook for suppliers and subcontractors in the private sector is naturally less certain, given that there are hundreds of individual contracts to attempt to novate.

BESA, which is working closely with the ECA with regards to trying to ensure stability for their members, said it viewed the meeting with BEIS as being broadly positive, albeit it at an early stage.

Rob Driscoll, BESA legal & commercial director, said he particularly welcomed the government’s work to facilitate talks with banks to create clarity around the financial situation for creditors.

While it is too early to say how many subcontractors and suppliers are directly affected by outstanding payments or loss of work, BESA is surveying its members to better ascertain the scale of potential disruption to the supply chain.

However, the organisation has said that some members, particularly those awaiting longstanding payments from cash retentions, were already writing off the cash.

CPA chief executive Dr Diana Montgomery said Carillion’s liquidation would have significant implications for the construction supply chain, where 86 per cent of employment is dependent on small and medium-sized sub-contractors. 

Dr Montgomery added, “The Construction Products Association is now focused on working with the Business Secretary Greg Clark, and our members who provide the products in the supply chain, to address the knock-on impacts this will have. Questions will need to be raised on how government procures effectively and its reliance on major contractors.”

“The focus will be on Carillion, but this must also be a wider issue that looks at keeping the UK’s £152bn construction market competitive and prevents something like this ever happening again.”

48-hour grace period

Speaking in parliament on Monday, Cabinet Office minister David Lidington said that the government was committed to safeguard the continuity of public services (accounting for 38 per cent of Carillion’s revenue in 2016).

But he added that the vast majority of the company’s contracts came from its private sector operations, so the cause of the financial difficulties “for the most part” was not due to public sector agreements.

The Official Receiver will take over running of the public sector services handled by Carillion, while also being charged with investigating the causes of the company’s financial failure.

Mr Lidington said the government will support the Official Receiver to provide these public services until “a suitable alternative is found”, either through another contractor or through in-house provision.

However, the private sector is only being supported for two days, he said, “The position of private sector employees is that they will not be getting the same protection we are offering to public sector employees beyond a 48-hour period of grace. During which the government will sustain the Official Receiver to give time for the private sector counter parties to Carillion to decide whether they want to accept termination of those contracts or for themselves to pay costs.”

The Insolvency Service is asking any parties affected by the Carillion collapse to register online here.

 

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