The collapse of Carillion is expected to trigger a rise in the number of construction companies going bust as subcontractors in its supply chain miss out on payment, a leading accountancy firm has warned.
Insolvencies in the construction industry increased by 8% to 2,633 last year, according to figures from the Insolvency Service, which is managing the liquidation of Carillion.
Insolvency experts at accountants Moore Stephens predicted a further rise in the number of business failures, pointing to the difficulties faced by firms in a sector in which profit margins are typically low. Lee Causer, a partner, said the collapse of Carillion could exacerbate the increase.
The forecast comes days after monthly figures for housebuilding activity showed the first fall since just after the EU referendum, with experts warning that the building industry has been rattled by Carillion.
Carillion’s former bosses will be questioned by MPs on Tuesday about their management in the run-up to its collapse last month under a mountain of debt as part of a joint inquiry into the collapse by the business, and the work and pensions select committees.
Richard Howson, who quit as chief executive after the firm’s first profit warning in July, – and Philip Nevill Green, who was chairman, are among those called to give evidence.
Last week the Federation of Small Businesses accused Carillion of abusing its dominant position to force suppliers to accept late payment.
Causer said: “Carillion has already left a huge number of subcontractors out of pocket, when they are already facing enormous financial pressures. The fall of Carillion could be the trigger for even more construction companies going under.
“Profit margins in construction are already very tight and late payment of subcontractors is now standard procedure for far too many in the sector.”
The number of days that construction firms are waiting on average for payment has risen from 52 five years ago to 69, according to research from small business finance company Funding Options.
Carillion was the main contractor on 57 construction projects worth a total of £5.7bn, including a £1.3bn HS2 contract
Guardian graphic. Source: Barbour ABI. Five highest value projects named
In the aftermath of Carillion’s collapse, it emerged that the company was making some of its subcontractors wait as long as 120 days for bills to be settled.
At least 377 former Carillion staff will be made redundant and the official receiver, which is handling the liquidation, said it was still shifting through contracts that will determine the future of more than 18,000 employees.
Rachel Reeves, who chair the business committee, said on Friday that many firms were now facing “potential ruin”, accusing Carillion’s directors of “ruthlessly exploiting their position to bully their contractors in a desperate bid to prop up their precarious business model”.
Paul Uppal, the government’s small business commissioner, said last month that legislation may be needed if there was not a “cultural change” in the construction industry to ensure prompt payment.
Moore Stephens warned the problems posed by late payment were likely to be exacerbated by increases in import costs, which have risen owing to the fall in sterling after the Brexit vote, as well as the need to plug a skills gap often filled by workers from the EU27 nations.