Carillion's cash flow: Cold comfort

With the Easter break upon us and the mercury still struggling to rise above zero, 2013 has felt so far like a year of endless winter. For specialist and main contractors trudging through the snow to sites that they may not be able to keep open, it may be tempting to see an analogy with the economy. In the contracting sector, winter has lasted for three long years, with precious few signs of warmer weather on the way. And this week, the icy winds blowing in from the continent have had the same effect on our climate as the eurozone crisis has had on the economy, chilling investor confidence and the chances of export growth for the construction industry’s clients.

It is the length of this cold spell which is really starting to affect the industry. As we reported earlier this month, main contractors’ cash flows are being badly hit, with over three-quarters of a billion pounds of cash leaving listed contractors’ balance sheets in the last year as they run out of options in the face of declining workloads. Wates boss Paul Drechsler tells Building this week that low cash reserves will be the “number one issue of 2013”.

But as rations run low, the most vital thing is that firms in the industry don’t waste their precious resources fighting each other in a bid to survive. In this context, continuing evidence of late payment by main contractors to their supply chains is, while understandable, deeply disappointing.

Michael Levack, director of the Scottish Building Federation, talks this week about the “tragedy” of small businesses being forced to the wall for lack of cash flow, and Drechsler flags his concern about main contractors not paying responsibly. Into this highly charged mix comes Carillion’s move - revealed by Building last week - to bring its standard payment terms to 120 days, albeit with an early payment system that the firm says will allow its subbies to receive money on their existing terms at no extra cost to them. Both Labour and Tory politicians have now hit out at the company.

Despite Carillion’s strenuous assurances that no existing suppliers will lose out, moving standard payment terms to 120 days must change the conversation - and balance of power - with its suppliers. Carillion, indeed, admits it has instituted the system because it provides it with “greater payment flexibility”. Certainly the 120-day standard sets a tone for all new suppliers looking to work with the firm, and as such seems to be a low watermark for the industry.

As rations run low, the most vital thing is that firms in the industry don’t waste their precious resources fighting each other in a bid to survive

The contractors vs subcontractors rift in the industry is as old as the hills, and Carillion is not alone in lengthening payment terms. But it doesn’t have to be this way. Reports from Latham and Egan onwards have laid out a blueprint for a different way of working based on partnering and a sharing of the risks and rewards. To stretch the analogy further, firms will do better to remember that when it’s really cold, you’ll last longer if you huddle together - rather than fight each other for the few places by the fire.

There is some evidence, from the housing market in particular, that the economic weather might be improving. And the shortlist for the project categories of the Building Awards shows that the industry can still produce some fantastic schemes despite difficult times. But for the moment it feels like the hopes that a new relationship can be forged, where suppliers and main contractors benefit from working ever more closely together, have receded with the bad economic climate. And that needs to change.