Collapse of Outsourcing Giant Carillion May Have Silver Lining

“Cash retentions” by large companies come under attack in the UK.

The bankruptcy of UK outsourcing behemoth Carillion in January has left in its wake a trail of financial destruction and mayhem, but it may end up having a positive legacy. More than 200 British MPs (out of a total of 650) have backed a campaign to crack down on construction firms which, like Carillion, routinely pay their suppliers late to spruce up their own balance sheets. The Aldous Bill, named after the MP who is leading the campaign, Peter Aldous, is intended to put an end to this practice.

Late payment of suppliers and subcontractors is a widespread problem in the UK, and many other countries. Perversely, the worst offenders are often large companies that claim to comply with official payment codes.

“It’s a bitter irony that while Carillion were fully signed up to the government’s prompt payment code, they were making their suppliers hang on for 120 days or more to be paid,” said Rachel Reeves, chair of the Business, Energy and Industrial Strategy Committee.

One of the common ways payment is delayed in the UK is through the use of so-called “retentions”. These are monies — often between 5-10% of a contract’s total value — that are held back by contractors until a sub-contractor has completed its job satisfactorily. The cash is held to provide some semblance of protection against late completion and defects arising during the rectification period. However, in practice, it is often withheld to bolster the working capital of the group withholding the cash…

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