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.