This article was first published in Building Magazine.
The demise of Carillion has, quite rightly, been widely reported in the press and has brought into sharp focus a number of deep rooted questions as to the procurement of major government and infrastructure projects. But it would be dangerous to assume that only those major projects are affected, as the fall out is likely to be far wider, and take some time to fully materialise.
Whilst the press quite understandably initially focused on the direct job losses arising, it was quickly recognised that the collapse of such a major player will have profound implications for those in Carillion’s supply chain, particularly for those that were heavily reliant upon those contracts. However, the full extent of the fall out could well be more widespread.
Given the low margins in the industry, and particularly on major projects, it is inevitable that there will be companies in the supply chain that simply cannot weather either the sums that they are owed or the cash flow impact of immediate cessation of work. Whilst arrangements are being made for loans to be available to those most affected, by its nature a loan can only be a short term (and partial) fix.
Whilst those companies one step or more removed should not, from a contractual point of view, be impacted (unless a carefully drafted and Construction Act compliant upstream insolvency "pay when paid" clause is in place), in many cases commercial pressure is being placed down the supply chain to ask subcontractors to "share the pain", regardless of the terms of the contract. Few subcontractors that are reliant upon repeat business from such dominant main contractor can afford to ignore such a request, and will end up taking a hit, notwithstanding that they are under no legal obligation to do so.
A considerable unknown for other projects entirely unconnected by Carillion is whether key subcontractors or specialist suppliers on their projects will turn out to have been exposed to the fall out, and the consequences of any specialist going bust as a direct or indirect result of Carillion’s demise would inevitably affect all of the projects that they are working upon.
There is clearly no magic solution to a problem of this magnitude, but it does serve to highlight the importance of some of the usual commercial and risk management considerations that should apply on any project. These include:
- On existing projects, being alert to any sudden deteriorating progression by key parts of the supply chain – unusual under-resourcing of the job or late delivery of materials etc may ring alarm bells that their financial condition and/or credit terms have suddenly deteriorated, in which case grasping the nettle sooner rather than later by exercising contractual mechanisms will be prudent
- Where things are going seriously off the rails, consider your entitlement to consider exercising the termination procedures under the contract (which will often require a two stage "final warning" approach) – or, if you are an unpaid subcontractor, consider your rights to suspend works. Either way, it is very important that the terms of the contract are carefully complied with, given the potential adverse consequences of dealing with suspension or termination in breach of the terms of the contract
- Review what collateral warranties you have in place, in case a key member of the supply chain goes under and you need to "leapfrog" past that bust entity to maintain or bring a claim. Ensure that appropriate collateral warranties are in place in relation to clear and proper contracts (since the collateral warranty is only as good as the contract it is collateral to), particularly for those with design responsibility
- For new projects, ensure that appropriate documentation is in place that enables the fall out of a key player going bust to be mitigated as far as possible. Ensure that good due diligence is in place to check that all appropriate insurances are in place and evidence has been provided (since for claims to which the insurance policy responds, a claim against an insurer can generally be brought by a third party, notwithstanding the demise of the insured party).
Certainly, the vast majority of projects should be unaffected, and there will be an element of randomness and bad luck as to those that have no direct link to Carillion which are affected, but it is an opportune moment to reflect on the importance of early issue spotting and ensuring that the usual sensible risk management steps are in place.
If you have any questions, or would like to discuss the above article in more detail. Please contact partner, Chris Kirby-Turner on 01322 623705 or email firstname.lastname@example.org