Collateral Damage

Back in January I wrote a post on the demise of Carillion, which generated so many good comments underneath it I wrote a follow-up post to discuss the points raised further. Of particular note was the fact that Carillion was notoriously bad at paying its suppliers and subcontractors, who were about to get clobbered. As regular commenter Bardon predicted:

The tragedy here will be all the competent subcontractor/suppliers that have been providing good services that simply will not be paid or at best get pennies in the pound for their debt in two to three years if they can survive that long. Just imagine that you have been strung along by Carillion and are now in 90 day arrears, had put in your December claim, paid all your staff and your suppliers including Christmas holidays and finding this out. And that is how it tends to go down.

This morning I read this:

Self-employed suppliers were among those most harmed by what a new joint report from two Commons Committees calls ‘recklessness, hubris and greed’ at Carillion.

Carillion was well known for its poor payment practices, extending its supplier payment period to 120 days despite signing up to the Government’s Prompt Payment Code. As the report notes, although it relied on its often self-employed suppliers, Carillion ‘treated them with contempt. Late payments, the routine quibbling of invoices, and extended delays across reporting periods were company policy.’

IPSE is calling on the Government to help stop this malpractice by expanding the powers of the Small Business Commissioner to include fining habitual late payers.

Self-employed suppliers will also lose significant income from the collapse of Carillion. The new report reveals that the company ‘owed around £2 billion to its 30,000 suppliers, sub-contractors and other short-term creditors’. They will get little back from the liquidation.

They don’t call him Bardon Soothsayer for nothing, you know? So what to do?

IPSE is calling on the Government to ensure self-employed workers cannot suffer from such a corporate catastrophe again.

Dave Jackson, Chair of IPSE’s Construction Advisory Committee commented: “If one good thing can come out of this review into Carillion, it needs to be better payment terms for those on public contracts.  Waiting up to five months to be paid impacts on everyone in the supply chain and is felt directly in the pockets of the freelance builders. The government needs to take action now and deliver on shorter payment periods on their contracts.”

Simon McVicker, IPSE’s Director of Policy, commented:“Carillion’s treatment of self-employed and other suppliers was nothing less than a disgrace. The company’s poor payment practices have even left many self-employed people out of pocket long after its collapse. At IPSE, we wholeheartedly back the report’s calls for urgent action to stop this ever happening again.

In the comments of my follow-up post, Bardon had this to say:

Australia has very effective laws to stop clients stuffing around with payment. Once an invoice is raised the client has two weeks to advise in writing on any deduction and reason to the claimed amount. The supplier then has two weeks to dispute the deduction by lodging a fast track adjudication. It takes a few days for an adjudicator to be appointed and both parties submit within two weeks. The adjudicator decides on the matter in say two weeks, based on the submissions and costs, the decision are binding on each party. I have used it a number of times and found it very effective, low cost and fast and haven’t lost one yet. The big guys are scared of it as the decisions are on the public record and it has stopped the whole scam of holding out on payment until the other party goes bust. It is a common threat that we use as well as long as you know what you are doing and dont submit spurious claims it is a fair system.

Will the UK adopt something similar? Probably not, in all honesty. The sorts of spivs who run outfits like Carillion have close, personal ties with the political classes, and if anyone is relying on the current Conservative party to pass sensible legislation to help independent suppliers deal with sprawling behemoths who boast of working “in partnership” with government, God help them. With their endless regulations and insanely bureaucratic outsourcing policies, governments are largely responsible for creating companies like Carillion and encouraging their behaviour in the first place; the government is therefore unlikely to step in and provide a solution now.

Instead, small, independent suppliers need to get smarter. It’s usually been the case that big companies dictate payment terms (and everything else) to their suppliers, who just have to accept them. The mentality in big companies has always been that contractors are desperate for the work and if they refuse to buckle under, they’ll just find another and there are always plenty more. However, I think as professionalism, competence, and delivery shifts from large companies to small suppliers, the latter are going to have more leverage than in previous eras.

In this new economy, it’s going to be imperative that small contractors can pick and choose the work they know will pay, and turn down jobs they know won’t. This is easier said than done of course, and all independent contractors dream of getting their first major contract with a big player especially if they have families to feed and bills to pay, but they’re going to have to get smarter if their clients are like Carillion. I once worked for a service-provider who refused to do lump-sum work for Korean companies because they simply wouldn’t pay. If the aim of the business is to make money, it is imperative you walk away from jobs which don’t. Another option is to insist on time-reimbursable work, or up-front payments, but this must be backed by a willingness to walk off the job if the client doesn’t pay the invoices on time. Naturally, the client will squeal and talk of blacklists, but in practice this rarely happens. I once had an absolute cretin of a manager who loudly told everyone he’d make sure I’d never work in the oil industry again. He seriously thought this sprawling global industry filled with charlatans, incompetents, serial liars, chancers, grifters, and arse-lickers was going to listen to what one man had to say about another. Unless you’re in an extremely niche industry with a small global footprint, you’re unlikely to find yourself frozen out for insisting a client sticks to the terms of the contract. And if are, then you ought to be hedging against this happening on every contract.

One obvious approach for small contractors is to keep their overheads very low, enabling them to go through lean periods. Another is for individuals to diversify their income sources, perhaps using the same skills but in different industries, so if there is no work in one area you can still be productive in another. There are obvious practical difficulties with this, but then there are practical difficulties with your client going bankrupt leaving you a hundred grand out of pocket, too.

Whatever the case, as these giant corporations become ever-more dysfunctional and prone to sudden collapse, the small fish feeding off them are going to have to get smarter. They should start by being more careful who they work for, and under what terms.

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30 thoughts on “Collateral Damage

  1. Yup. +1 to all of that.

    We are quite harsh with bad payers – they get rapidly put on prepayment until their morale improves, at which point we might experiment with issuing a smallish invoice in arrears. If that doesn’t get paid properly, then they’re back on prepayment, otherwise we’ll continue.

    One particular client pays late, around 40-50 days, but they *always* pay at this point. Another always pays after the first reminder. We don’t mind this. But chasing people for 6 months to get paid for work is not our bag. We’re not non-shareholding indirect investors in our clients.

    If they don’t like it they can try elsewhere, but they won’t find softer conditions.

    We also have really low overheads which we can reduce further in lean times by taking less salary if we need to.

    However we’re in an industry where there’s more demand than supply. I can imagine that for builders, widget-makers and so on it’s indeed hard to say no to a Carillion or similar if there’s greater possibilities for the purchaser to go elsewhere.

  2. “Will the UK adopt something similar? Probably not, in all honesty. The sorts of spivs who run outfits like Carillion have close, personal ties with the political classes, and if anyone is relying on the current Conservative party to pass sensible legislation to help independent suppliers deal with sprawling behemoths who boast of working “in partnership” with government, God help them.”

    A concrete measure. One that provides an efficient mechanism in place of ultra-expensive litigation. I didn’t see this type of proposal in the report, just generic railing against greed. So your probably not can be safely upgraded to never.

  3. In the US there’s a website called glass door that allows job seekers to find out what current employees think of potential employers. I don’t know too much about it but it seems to be a solid concept at least.

    I suspect a similar contractor specific site could be extremely valuable in helping contractors avoid bad contracts and incent the larger users of (sub)contractors to behave better

  4. In Switzerland there’s a whole system for “Betreibungen”. Once a debt is bad, you can register a “Betreibung” at the relevant office (public), who will contact the debtor to inform them that a “Betreibung” has been registered against them and they’d better pay it. This also goes on their record which, if they’re an individual, can screw them if they want to rent an apartment, get credit, or similar, since you’re often asked to provide a copy of the register.

    Once it’s paid, the register states thus, but the fact that there *was* a Betreibung stays on there for a number of years.

    If you contest there’s basically a small claims court type affair that’s pretty quick.

  5. Unfortunately all the scum of the Earth appear to have close personal ties to the British Political Classes.

    Sacking the Senior Civil Service en masse with zero compo and their pensions confiscated would be a good start tho’.

    Please don’t forget to let the arseholes below know what you think of six years in jail for speaking your mind.

    https://www.sentencingcouncil.org.uk/wp-content/uploads/6.4328_Public_Order_Offences_Guideleines_Consultation_web.pdf

  6. I once had an absolute cretin of a manager who loudly told everyone he’d make sure I’d never work in the oil industry again.

    Heh! What was the background to that? Sounds like it’d make a good blog post 🙂

  7. Heh! What was the background to that? Sounds like it’d make a good blog post

    I wrote about it twice, and twice got into trouble. 😉

  8. Factor the invoice to say HSBC, and let’s see if they still feel like the Don when HSBC come around asking for payment.

  9. Trouble is, the big guys have air conditioned offices full of contract lawyers and accountants and HR people, while the little guy has to research all this stuff him(or her)self.

    Providing a system of justice is one of the most basic functions of government (after defence of the realm). It’s not beyond their wit to implement the Australian system.

  10. Two things:

    Tim, that cretin was right! You are not WORKING in the oil industry, you are merely getting paid!!!

    As a small business owner I have regularly been shafted by biggies. The last time, I saw it coming but couldn’t get out of the way in time. Since then, we have down-sized and become more flexible (not as easy in Spain with its antiquated labour legislation) and fixed costs half what they used to be. We now are only open for client attention and contact from 8.00 -16.00 (unheard of in Spain but is working a dream).

    We won’t take work that isn’t directly profitable and if there is the slightest doubt about getting paid, neither. I now spend double the time going through the terms with customers and making sure I have everything clear.

    I have instigated up-front payment for a small discount and as most of our customers have good cash-flow (most of the time) and our bills are relatively small, I have found an excellent line of financing as we grow back fro the last beating.

    I have structured things so if we ever get hit again, I will be able to bow out gracefully with no problem.

    But I also agree, the market is changing. More power is gradually accruing to the small, nimble company that has some sort of specialist (or unique if they are really lucky) product/service. Mediocrity in SMEs is on the way out.

  11. That “Australian system” is not without flaws.
    Much of my business is supply to the government.
    Most in small amounts, starting at $150 and ranging up to $5,000
    Mostly purchases by the govt are in the range of $250 – $600

    None of it is direct. It all goes through a middleman “agency” (known elsewhere as a “ticket clipper”) This agency serves no purpose other than to complicate the transaction and increase the cost to the client (govt.)

    They also funnel the payment. The government is required by law to pay within 2 weeks.

    It usually takes only another week or so for me to be paid, however it has taken up to 2 years.

    I would rather go back to dealing direct with the government departments.

  12. Tim, that cretin was right! You are not WORKING in the oil industry, you are merely getting paid!!!

    Blimey, looking at it that way, he was spot on!

  13. Much of my business is supply to the government.

    I thought you ran a pub?! Or is that what you meant?

  14. You know, another way the government could very quickly address this is for it to be a tender requirement for all public sector contracts that the head contractor pay the subbies within 30 days of invoice being presented.

    Wouldn’t solve everything but it would be a significant start and if Tim’s theory that subbies will chose their work based on payment record, it will automatically put pressure on private sector contracts.

  15. @gary

    It seems that factoring invoices is a problem in Australia in that it takes you out of the security of payment legislation protection. I also noticed in this article that Singapore also has security of payment legislation, I don’t see any reason why the UK cannot have something similar.

    http://www.tglaw.com.au/construction/2018/02/01/debt-factored-invoices-not-enforceable-payment-claims/

    @steve- the protection is limited to the building and construction sector only.

    There is another reason why payments may not be made on time that isn’t necessarily a client trying to screw a supplier. My organisation is just about to complete a major refinancing exercise with a new investor coming on board and tipping it a large amount of equity. This has taken a year longer than planned to eventuate. We are a growing company that require specialist plant which is relatively expensive, as we are growing the demand on our working capital is such that we cannot cash flow even if our overall margin is in the black. With the refinance being as late as it is, it has meant that we have been pushing our suppliers payments way out. I even have contract staff that are six months, we don’t like this, it costs us more in the long run and we are continually combating writs and the like. We will pay all our suppliers but the last years in particular has been pretty stressful for us, our accounts staff and our suppliers. I hope to fuck that this deal settles this month because if it doesn’t we are truly screwed.

  16. @stuart

    All federal, state and local government construction contracts in Australia require the contractor to make a statutory declaration (affidavit) that its suppliers on the project have been paid as part of the back up for the contractor’s monthly progress claim. They don’t provide for the length of payment terms between the contractor and supplier, only that payments have been made to them when due.

  17. @ Bardon that is a start and is probably useful post bust when the hanging juries convene to pick over the carcass of a dead company.

    But ultimately the problem seems to be large head contractors (ab)using their buying power to run a negative working capital position to their benefit and subbies detriment…

    Not sure what the correct economists term for this is but a perfect example of when government intervention is a good idea. open to other ideas but by changing their buying habits, not even legislating, govenrment could influence what are considered commercially acceptable terms in favour of the sub contractors.

  18. As a general ( not infallible) guide, when a main contractor is not paying it’s subbies and suppliers on time that main contractor has problems. If someone had been paying attention to this Carillion could have been investigated much earlier and the problems addressed in good time.

  19. It’s not so much late payments that are the problem, it’s late payments *and* uncertainty that the payment will be forthcoming. Everyone will have a client who pays late, but is sure to pay. They’re not a problem, you just factor that in. The problem is clients who have no intention of paying, or make you expend considerable efforts to get your money as a matter of course, or go bankrupt while you’re waiting.

  20. On a brighter note I just read through my comments on Tim’s previous referenced blog on this subject and noted:

    “Bardon on January 18, 2018 at 12:57 am said

    I just bought into ERM Power Ltd [ASX:EPW]”

    I since sold them on the 14th March 2018. The gain with dividends over that short period was 12.4%, which equates to an annualised 114% return.

    This is not investment advice, just plain old bragging!

    Link

  21. Much of my business is supply to the government.

    I thought you ran a pub?! Or is that what you meant?

    Most of my government supply is accommdation, also quite a lot of catering (their snouts love being in the catering trough).

  22. “One obvious approach for small contractors is to keep their overheads very low, enabling them to go through lean periods.”

    True enough, but I wonder if it implies that small contractors are asset light, or have low capital requirements. The scenario is small contractors end up hiring kit from larger, asset heavy firms, who can be killed by a fall in utilisation rates.

    “Another is for individuals to diversify their income sources, perhaps using the same skills but in different industries, so if there is no work in one area you can still be productive in another.”

    Again, true enough. But.. I wonder. I once knew an IT contract developer, who had an HGV licence. How’s that for diversification? Now, I can’t put my finger on it, but I think there’s a growing problem of over-specialisation, related to the old “Job-For-Life” concept. That wasn’t necessarily a single job, but multiple roles within a single firm. We seem to be trending towards reversing that; a single role over many employers. Not sure if that’s going to be any better. Something about bird species on the Galapagos Islands.

    “these giant corporations become ever-more dysfunctional and prone to sudden collapse”

    Depends what drives the collapse. Again, I have to agree with you, as I can’t see that you’re obviously wrong; but…

  23. True enough, but I wonder if it implies that small contractors are asset light, or have low capital requirements.

    It does: a brain, their hands, and a toolbox that can fit in a van, mainly. If their job is capital intensive, let the dinosaur buy it or rent it for them.

    I once knew an IT contract developer, who had an HGV licence. How’s that for diversification?

    Exactly, something like that.

  24. Is this “you’ll never work in this industry again” BS specific to the oil patch?
    I must have heard it dozens of times, my buddies too.
    The full quote goes:
    “You’ll never work in this industry again… until we need you.”

    Turning up at reception saying you’ve got an appointment with the finance dept works better than a blizzard of letters and phone calls. “It’s OK, I made the appointment. I can wait.”

  25. Do what we use to do in the metal fabrication game,if we weren’t paid for a particular job after a period of time we would go back and dismantle or even cut up whatever the job was, as far as we were concerned it was our property until we were paid.

  26. I’ll be honest with you – I have limited sympathy for the suppliers here.

    No one made them supply, and if a client had stiffed me for 120 days I’d never do business with them again.

    Unless I was desperate and they were the only ones calling. In which case I’d not be in a position to complain about the risks I took by taking them on as a client.

    Most of these guys made decent money over all – they were attracted to this due to the over-priced payments dangled in front of them for government work which are usually high enough to be work the hassle of dealing with government requirements.

  27. @Agammamon

    I agree that if the suppliers entered into agreements with 120-day payment terms then they did this voluntarily and in full awareness of the commercial implications, so they have no axe to grind. Carillion slipping past 120 days would be when Carillions contractual obligations are not being met and yes so what as late payments are quite common, so once again nothing for me or you if we were not direct stakeholders to get upset about.

    The issue here is none of the taxpayer’s funds being paid at all, and this is where I can sympathise with the suppliers and it is where the suppliers and taxpayers do have an axe to grind. Did Carillion trade insolvent, did they notify the market promptly of their financial situation and does the state have an obligation to ensure that taxpayer funded payments are flowing down through to the lower tier suppliers to some extent, certainly more so than it appears that they are currently doing ie no monitoring at all, these are the type of questions that should be asked here.

    But yes, at the end of the day counterparty payment risk is the critical risk that all suppliers are exposed to and it is they that must do what is necessary to minimise its occurrence, since they are the ones that will suffer when it occurs. Running a business is a risky proposition and the last I looked something like more than 80% of new businesses that fail.

    Business is a risky business.

  28. Most of these guys made decent money over all – they were attracted to this due to the over-priced payments dangled in front of them for government work which are usually high enough to be work the hassle of dealing with government requirements.

    Well said. Also about all that needs to be said.

  29. The Australian system referenced is not as comprehensive as claimed, I suspect.

    Do your own research and check whether it applies to construction-related industries only.

    A close friend of mine may have worked for an organisation 5 years ago that was operating whilst insolvent and had an Accounts Payable policy that prioritised construction suppliers over, say, the cleaners who ended up on 120+ days.

    The legislation also differs by state and territory, I suspect. Australia being a country that confuses geographical size with complexity.

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