Credit Management March 2018

OPINION
CRUMBLING
OF CARILLION
The construction industry can be
a tricky sector for credit managers,
but these issues are nothing new.
AUTHOR – Derek Scott FCICM
I
have found all the media coverage The contract still needed to be completed, but
on the collapse of Carillion very payments for the scaffold were made direct to
interesting, but unless you have us by the council at a more favourable rate.
worked in construction, particularly Over the years I encountered many more
in sub-contracting, then you cannot notoriously slow payers, but with quality
possibly understand the real credit now in place. A combination of
problem.
Firstly, the awarding of contracts without
any due diligence into the financial position
of the nominated contractor goes back almost
to the relief of Mafeking!
There appears to have been no checks
in relation to its balance sheet, last profit
and loss accounts, or its ability to pay
sub-contractors? Often the lowest tender
is awarded the contract. This applies to
government, councils, public utilities and
major businesses.
The problem does not always end with
the main contractor, it’s possible you have a
chain. There could be a managing contractor
and sub-contractors who will need to use
risk assessment and external credit circle
intelligence meant these companies could be
identified before any business was entered
into.
After initially considering guarantees, and
finding these unsatisfactory, my payment
agreements were born. These have been
covered with some scorn over the years, but
out of dozens I put in place, they were never
the subject of any disputes.
If in trade credit you have a totally black
and white credit policy, it may make you
look very efficient, but in truth, you could be
stifling the growth of your company. A true
professional trade credit manager must ‘think
outside the box’ of basic credit management
other sub-contractors. I know first-hand how rules. Of course, there are risks, but
dangerous these types of chains can be.
I entered the world of construction at
the beginning of 1970, recruited to clear
numerous debts, some going back several
years, and to dramatically reduce a Days Sales
Outstanding (DSO), which stretched back to
the horizon.
One substantial debt was in relation to
scaffolding supplied for a refurbishment
contract given to a contractor by a large city
in Scotland. The contractor had an impressive
name, and what appeared to be an equally
impressive head office address. The branch
claimed there were no major issues and that
the delay in settlement was entirely down to
slow payment by the council.
Having failed to obtain payment I flew to
Scotland to meet him. His head office address
was a room above a sweet shop next door to
a garage. Our meeting took place on a park
bench in the middle of a field. His share
capital was £100, two shares issued.
I did manage to recover the majority of
the outstanding money, but as he soon went
out of business we still incurred a bad debt.
taking them is what you really earn your
money for.
There were instances where our customers
were good payers, and we enjoyed excellent
relationships with them, but higher up
the chain was a ‘bad apple’. This required
some real PR, voicing our concerns to
clients and in most cases we were able to
get round the problem. There were few real
‘no go’ companies, mostly major contractors
with very slow payment policies using the
sub-contractors as free bank loans.
I would never claim that we wouldn’t
have lost any money following the collapse
of Carillion, but I doubt our debt would
have stretched as far back as many of the
substantial sums involved. There would
also have been some serious concern coming
through from our credit circle members.
I’m keen to know if those with Carillion
service contracts contacted the Government
regarding late payments? I certainly would
have and suggested that unless some action
was taken, we would pull the plug on our
labour.
The Recognised Standard / www.cicm.com / March 2018 / PAGE 26