, Building
In January 2018 Carillion went into compulsory liquidation holding around 450 public sector contracts and owing money to something like 30,000 suppliers and subcontractors. It had issued a profit warning the previous July. Before that it had been winning work, and the order book had looked healthy the whole way down.
The pattern repeats at every scale. A regional contractor with a £40m turnover and a full site list goes under in March, and the subcontractors who were on site in February are still trying to work out what they missed.
Turnover is easy to buy and margin is what you sell to get it
Main contracting runs on thin margins. Two to three per cent net on a fixed-price job is normal, and on competitively tendered work it can be less. A firm that wants to grow can do so almost instantly by bidding lower, because there is always somebody who will let you build their building for less than it costs.
That decision does not show up as a loss for a long time. Construction revenue is recognised over the life of a contract based on an assessment of the stage of completion and of the final outturn. Those assessments are estimates made by the people whose bonus depends on them. A job priced at minus 4% can be reported as breaking even for eighteen months, right up until the point where the remaining work is all cost and no value.
Meanwhile the cash looks fine, because a growing contractor is collecting payments on new jobs while the losses sit in the back end of old ones. Growth funds the gap. The failure comes when growth stops, or when one large contract goes wrong quickly enough to be undeniable.
The warning sign inside your own business is a rising proportion of work won on price alone, with no negotiated or repeat element. The warning sign in a customer is the same thing viewed from outside: a firm winning a striking amount of work in an area it was not in last year.
Everybody in the chain is lending to everybody else
The structural problem is that the industry runs on credit extended by the parties least able to afford it.
You do the work. You apply for payment. The main contractor issues a payment notice, or fails to and becomes bound by your application unless they serve a pay less notice in time. The due date and final date for payment are set by the contract, and the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009, banned pay-when-paid clauses and gave you a right to suspend performance for non-payment with seven days notice.
What the legislation did not do is make anybody pay faster than the contract says. Thirty-day terms from a valuation date that was three weeks before you applied is 50 days of credit, funded by you. Retention of 5% takes another slice and holds half of it for a year past handover. You are paying your labour weekly and your merchants on 30 days.
Two changes made this materially worse for some firms and better for others. The VAT domestic reverse charge, in force from 1 March 2021, means most business-to-business construction supplies are invoiced without VAT, and the customer accounts for it. Subcontractors who had been using the VAT they collected as a rolling cash float lost that float overnight. Separately, the Construction Industry Scheme deducts 20% from labour value for registered subcontractors and 30% for unregistered ones, so a subcontractor without gross payment status is financing HMRC as well.
One insolvency knocks over the people who were doing the work
When a main contractor fails, the effects run outwards immediately.
- Work in progress that has been done but not certified is usually an unsecured claim. You rank behind the secured lender, the administrator's fees and the preferential creditors.
- Retention held on jobs completed two years ago is gone in most cases, because it is rarely held in trust.
- Materials you delivered to site may or may not be yours, depending on whether your retention of title clause survives them being fixed into a building. Once a brick is in a wall, it is not your brick.
- Your own labour and plant have to be redeployed within days, or you carry the cost of idle crews.
- Bonds and parent company guarantees may respond, but only if you took them at the start.
The chain continues downwards. A subcontractor who loses £180,000 of certified and uncertified work stops paying their own suppliers, and a plant hire firm three steps removed takes a hit from a company it has never traded with.
The signs are visible before the announcement if you look at the right things
Nobody tells you they are about to fail. But there are observable changes, and the useful ones are behavioural rather than financial.
Payment rhythm changes first. Certificates start arriving late, then arrive on time with unexplained deductions. Someone queries a valuation you have been submitting in the same format for a year. A payment lands in two parts a fortnight apart. Requests to agree a "revised payment plan" for work already certified are the clearest signal in the industry.
Then filings. Companies House shows the accounts, and more usefully shows whether they were filed late, whether an auditor resigned, whether new charges have been registered over the company's assets, and whether directors have changed. Late filing of accounts by a company of any size is worth a phone call. A newly registered charge in favour of an invoice financier is worth two.
The Insolvency Service publishes company insolvency statistics by sector, and construction has consistently accounted for more company insolvencies than any other industry. That is not a comment on any individual firm. It is a reason to treat a single large customer as a concentration risk rather than a relationship.
What you do about it is unromantic: check the accounts before you take the job, keep applications and notices absolutely to contract so your entitlement is clean, resist the drift into having one customer worth 40% of your turnover, and price the credit risk into the rate rather than hoping.
Where this shows up in the game
Main contractors arrive in Business Baron with the Property & Construction Track, an add-on to the full game. Profit and cash sit on separate screens, customers pay on their own terms, and some fail owing you money. A firm with a full order book can run out of cash while its profit and loss account still looks fine, and the game shows you that plainly.