Following our conversations on Twitter and Linkedin last weekend (see the ‘storify’ below), Carillion has issued a , Grant Roxburgh wrote to his MP, Building has written a followup article about the interest of MPs in the subject, and Construction Manager has interviewed the Group Corporate Affairs Director, who says the 120 day standard terms are in fact a ‘technicality of reverse factoring’ and optional.
I don’t have any expertise in this area, I’m just listening to what is being said and curating it together. As a result I’ve been approached by various people who ‘would like to talk’. Not being an expert in credit, I’d rather let the experts talk, so are you an expert? Do you know one? If you are please add your views below. Is this approach to credit really reasonable, or is it about easing ones own borrowing problems by using ones SME creditors as an alternative bank?
NB. I’ve included extracts from the Building articles in the ‘storify’ below, but you will need to register on the site to read them in full. Registration is free.
What people are saying about Carillion’s new 120 day payment terms
On Saturday 23 March I spotted a status update by Grant Roxburgh on Linkedin. He shared a story from Building Magazine about Carillion, one of the major UK Main Contractors, switching to a 120 day payment plan. This is my curation of what was said on Linkedin and twitter in the hours that followed.
Storified by Su Butcher· Thu, Mar 28 2013 06:16:54
The facts
We have a very wide range of payment terms which are negotiated with all of our suppliers on an individual basis. These range from our standard terms, which we extended last year to 120 days, to payments in advance for some of our smaller suppliers.
We are also working on a range of initiatives that will help to improve access to credit and cash flow management for our supply chain.
One of these initiatives is our Early Payment Facility (EPF) which we relaunched last year in support of the Government’s Supply Chain Finance Initiative which aims to improve cash flow in the supply chain.
At the time the Prime Minister said: “I praise the commitment made by these businesses today and the wider support they provide for their supply chains. In the current climate, viable business can struggle to get the finance they need to grow – this scheme will not only help them secure finance and support cash flow, but will help secure supply chains for some of our biggest companies and protect thousands of jobs.”
In addition we recently held an event, which was supported by a senior government advisor, to provide an insight into Supply Chain Finance and the associated benefits for suppliers. Carillion has also recently signed the Government’s Prompt Payment Code.
A large number of key suppliers have already signed up to the scheme and the feedback has been very positive. Many more suppliers are in the process of joining as they recognise the benefits.
How does our Early Payment Facility work?
1. The EPF programme enables many of our suppliers to receive payments against approved invoices in advance of their current contractual terms and this facility is being rolled out progressively to our suppliers. Please refer to this leaflet for further details about the EPF.
2. Carillion is not charging for this facility and payments will continue to be made to suppliers in line with existing terms at no cost. The only fees associated with this facility are those incurred when the supplier chooses to access funds earlier than the existing payment terms.
3. Independently of this, Carillion is increasing our standard payment terms to 120 days with a Supplier Incentive Scheme in place to ensure the supplier’s financial position is not detrimentally affected by the change in terms versus current position. BUT, as already explained, payments will continue to made against existing terms at no cost, including those subject to Public Sector Fair Payment Charters.
4. Irrespective of current payment terms, all preferred suppliers will have the opportunity to access payment early through the EPF at very competitive bank rates; far lower than most small and medium sized businesses (SME’s) would be able to access via traditional routes.
5. Suppliers who work on contracts subject to Public Sector Fair Payment Charters will be able to receive payment in line with those terms at no cost to themselves.
6. In essence, our EPF gives our suppliers access to working capital by enabling them to borrow against Carillion’s balance sheet, either at no cost to themselves, or at fees that are more competitive in comparison with typical bank borrowing.
This initiative is designed to help businesses, particularly small and medium sized enterprises (SME’s) to improve their cash flow and reduce their borrowing requirements at a time when many SMEs are unable to borrow from banks.
Frequently Asked Questions
Q. Is it expected that all Carillion suppliers extend their terms?
A. Carillion has a very wide range of payment terms ranging from payments in advance up to our standard terms. We negotiate payment terms with all our suppliers on an individual basis and we are working on a range of initiatives, such as the EPF, which will help to improve access to credit and cash flow management for our supply chain.
Q. Why is Carillion requesting that suppliers extend payment terms whilst also providing the EPF which enables them to get paid ‘early’? Why not just stick to original terms and pay in line with these?
A. The extension of our standard payment terms provides Carillion with greater payment flexibility. BUT, as already explained, all of our suppliers have the opportunity to use our EPF, regardless of the terms that they are on, to receive payments either earlier than they do now, or no later, at no cost to themselves.
We hope that this helps to address concerns which may have been caused by the recent negative coverage around this issue. However, if you would like further information or have any questions about our supplier payment arrangements please contact us.”
Last week, Building revealed the firm had extended its payment terms to 120 days and is implementing “reverse factoring”, a financial mechanism that allows suppliers to be paid early if they pay a charge to the bank.
Carillion says that the scheme is optional and that it is offering to reimburse suppliers for the bank charges to ensure they are no worse off. The company says the system is aligned with the government’s Supply Chain Finance scheme – itself a form of reverse factoring that is aimed at easing cash flow through the supply chain.
But Labour’s shadow business secretary Chuka Umunna (pictured) said the suggestion Carillion may be using the government’s finance scheme to “perpetuate late payment” was “worrying”. “Where large firms are abusing their position to give suppliers increasingly unfair payment terms – effectively forcing their suppliers to bankroll them – this is an unacceptable practice and must be stopped,” he said.
…
A spokesperson for the Department for Business, Innovation and Skills, would not comment on Carillion’s scheme, but said Supply Chain Finance “should not be used as an alternative to prompt payment”.
This week Carillion defended the scheme with a statement on its website after the news prompted a campaign on social media site Twitter, with users promoting the hashtag #DontWorkWithCarillion to express their views.
Carillion confirmed that payment in 120 days was now its “standard terms”, but said that some small suppliers got paid earlier. “We have a very wide range of payment terms which are negotiated with all of our suppliers on an individual basis,” the firm said.
Carillion said around 120 firms had signed up to work under the new system, with a further 50 in the process. “The feedback has been very positive,” the firm said.”
Click link below for full article:
#dontworkwithcarillion
Here’s my idea for a TRUE win-win. Major Contractors utilise the reverse factoring facility being made available to them in order to strengthen their balance sheets and improve cash flow for their valued supply chain partners.
Example: A £10,000 invoice submitted by a supplier on 65 days from application or invoice month-end payment terms would be paid on 30 days, i.e. 35 days earlier.
The major contractor pays a nominal finance charge of £21* in order to access greatly extended credit terms on its purchase ledger and to ensure that it’s supplier is paid promptly. That’s a cost to the major contractor of just 60p for each day of extended credit.
The benefits to the parties are clear. The major contractor leverages it’s position in the market in order to strengthen its balance sheet AND the sustainability of its supply chain. The suppliers receive a major cash-flow boost at a time when it is needed most.
IS THAT NOT A TRUE WIN-WIN?
*Example uses fee calculated as £10,000 x (Libor 3M +1.65%) x 25
days /365 . Exact fees will be confirmed in due course.
However, Denning said that the 120-day limit is in fact a legal technicality of reverse factoring, as suppliers will remain on their existing contractual terms.
“It defines the period within which Carillion has to pay the bank, and so it gives us more flexibility to have our working capital for longer. If we hadn’t introduced something to give us more flexibility then there would be no benefit to us in the scheme, just costs.”
Denning said that similar systems have been available in other sectors for around 10 years, and that Citibank and Santander are also active in this area. Balfour Beatty is believed to be looking at a similar scheme.
Denning admitted that the scheme is “opaque”, but said: “We feel a bit aggrieved – we were trying to help when the government is asking for help. It’s not suitable for everyone but we’re offering it and saying ‘would you like to try it’. If they don’t like it, they’re on their normal terms.”
“But if you’re a supplier having trouble borrowing from the bank, then you have the ability to get access to cash at roughly a 2% interest charge. The SME is borrowing against Carillion’s [borrowing] covenant to get money cheaply if they want it.”
The Carillion phrase at the top ‘technicality of reverse factoring’ sums it up for me, sorry but WTF ?? to use site based parlance.
This seems to me to be a financiers and bankers term, weasel words for shareholders not words from a builder.
I have not the time (or inclination) to look these people up, (I have better things to do frankly, reading this blog for one which is amazing btw Su) but in the industry Carillion already hold a reputation for battering SMEs on prices. Also it strikes me and a few others that some of their “work winning” methods are suspect. I would put a bankers bonus (if I had it) on some kind of financial leveraging going on behind this builders facade. (sub prime mortgages for the Construction Industry anyone)
I am also concerned that this may be a very deliberate ploy to drive subbies and SME’s out of business altogether, not sure how that would benefit them but is it not difficult to envisage that as an outcome.
Steer clear would be my recommendation – if you can, where is that #tag again?
Thanks Janet.
I should point out that the ‘technicality’ phrase was quoted from the CM article, not from John Denning himself, though he is quoted in the article saying:
“It defines the period within which Carillion has to pay the bank, and so it gives us more flexibility to have our working capital for longer. If we hadn’t introduced something to give us more flexibility then there would be no benefit to us in the scheme, just costs.”
What I can’t understand is why they should obtain working capital flexibility from their suppliers.
Hi Su, I actually wrote to Michael Fallon MP, Minister of State for Business and Enterprise – not my MP.
As you know, I see absolutely no reason why Carillion shouldn’t pay the reverse factoring charges themselves. They need they working capital flexibility, why shouldn’t they pay for it?
Thanks for the correction Grant.
Me neither.
Hi Sue,
This is the group that have refused to take on ‘project bank accounts’ (a statement last year from their CEO made that very clear – the same group that have rebate agreements with their suppliers (not something the suppliers want to enter into) that leaves them with little or no margin – the same group that makes money from holding working capital for as long as possible with banks (treasury departments – the long the deposit the money for the more interest they achieve) as it boosts their margins on any project.
Between squeezing the SME’s, suppliers and holding capital with banks they make money for themselves and save money at the expense of others cash flow (but achieves the governments 20% reduction in build cost).
This is just easy for them – and no real innovative thinking required. What are the government doing to support SME’s……..oh yes…..listening to the large corporate lobbying groups on a daily basis…!!
The biggest threat to any business is poor cash flow and this is especially so in the SME construction sector. What are they doing? Why has Government let this happen? What message does this send to others? Where will this leave the back bone of the industry?
Thanks for the correction on the quote Su, although the principle and sentiment remains.
Talking of Govt and large corporate lobbying groups I understand from our “conversation” with Carillion’s Mr John Swinney at EcoBuild that DECC spent a lot of time listening to Carillion before awarding the Green Deal Birmingham LA £0.6bn contract (or £1.6bn?)
Finally need I point out that it seems glaringly obvious to me that this smacks of a tried and tested business model that has worked for large supermarket chains in the past. That of diminishing the market pool by driving companies deliberately out of business so that they can control the remaining few in their supply chain.
If this is indeed the case then I have news for you Carillion, you are 20 years past your sell by date, we may not have unions any more but the world is on our side with social media and the truth will out.
I think Janet B has hit it – social media means natural justice will out.
Carillion – and others like them – are being exposed in ways they have not previously experienced.
It might take a while but they have manipulated a bit too cleverly for a bit too long.
I notice Sarah Fox has written a blog post with some legal background here.
http://www.enjoylegallearning.co.uk/cashflow-and-carillion/
Sue,
As I have already stated cash & cash-flow is king and poor cash flow is the biggest killer of SME’s especially in the construction sector.
I have not seen the full arrangement but this sounds like some kind of in-house invoice discounting facility, with their own fee system attached. Is this the case?
The reason they (Carillion in this instance) hold money is because they make money from it (some say up to 33% extra on any project) via various banking arrangements. Fair payment is a must and Project Bank Accounts (PBA’s) can help but this will need willing partners and clients (educated clients) working together.
If Carillion (assuming 33% is correct) faced the prospect of reducing their margin by 33% they would have to be more innovative in their approach to the clients requirements to make up the potential lose (hopefully without reducing quality).
I had a phone call with someone who works for a larger company yesterday. He felt that 120 day payment terms didn’t damage larger companies, many of whom are working with Carillion already. In fact he said other large contractors already have 120 day payment terms, though they might not have been as honest as Carillion in spelling it out, instead they have just implemented them by dragging payments.
My caller’s main point was that complaints about this story were largely coming from SME’s who don’t work with big firms like Carillion anyway, so what has it got to do with them?
Playing devil’s advocate here…
The call you received just sums up the arrogance of larger companies and their lack of understanding of how supply chain mechanics work.
The risk here, and it is a significant one to the MSME sector, is that smaller main contractors will see the industry leaders adopting these significantly extended payment terms and follow suit.
These smaller main contractors will not have access to reverse factoring and there won’t even be an “option” for their suppliers to get paid promptly.
This is a real watershed moment. If 90-120 day payment terms become the norm in the construction industry, MSME supply chains everywhere will collapse like a houses of cards.
That it why this has everything to do with MSME’s. Large companies would do well to remember that this isn’t all about them.
Hi Karl,
Carillion have a statement here which includes a link to more information about their Early Payment Facility.
http://www.carillionplc.com/carillion-payment-terms.aspx#.UVvkAqtARg8
Of particular interest is item 5:
“5. A third element of the EPF package is an agreement between Carillion and its suppliers to change their payment terms to 120 days. Changing terms to 120 days sets the period within which Carillion has to pay RBS in settlement of the amounts RBS has paid to our suppliers under the EPF. It does not determine the date on which suppliers are paid, as suppliers can arrange their payment dates through the EPF to suit their circumstances. Experience shows that suppliers are being paid on or before the date on which they would have been paid under their previous contractual terms and at no cost to the suppliers.”
This seems to imply that Carillion are attempting to bring their payment arrangements with subcontractors in line with their banking arrangements.
Hi Devil’s Advocate,
I find the statement from the caller above that complaints are “largely coming from SME’s who don’t work with big firms like Carillion anyway, so what has it got to do with them?” actually very condescending.
Also as Grant states this amply demonstrates their “lack of understanding of how “supply chain mechanics works”.
I have witnessed the devastating effect of this arrogance and ignorance on supply chain mechanics over the last 20 years as my industry has been gradually de-skilled and marginalised helped by “market forces” and successive Govts who value bankers over builders. Hey, guess what ..we now have (as I said) a banker pretending to be a builder , well that’s just great isn’t it !!
I am watching now as very many good M&E subbies (and their SC’s) have already gone to the wall in the North and at the moment they are “dropping like flies” as I write, I can’t think this is going to help those who are left.
I also know of a number of special skill MSME’s and SME’s (including us) who who have worked for and (maybe)do work for Carillion, although it would be no great loss to Carbon Saver anyway if we didn’t.
We got Carillion out of a very tight spot on a tricky project recently due to their complete dearth of in house expertise on Building Regulations (legal stuff and sort of important ?) Not for the first time we as a “bunch of girls” (my term btw not theirs) had to wade in and sort out the “big boys”, next time they can f*** off. We are busy anyway and our clients pay up immediately because they value us and we like them.
It is the principle of this and the astonishing arrogance, (certainly a bevy of lawyers are behind their response “statement”) egging on their macho gang of “big boys” to follow suit.
I don’t pretend to understand the money stuff above as I am an Engineer but I understand the construction industry and it’s machismo posturing and I can see when someone is taking the p**s.
Is there a lawyer in the house?
Wow, this is getting heated Janet……… Keep at it, would not wish to see such arrogance spreading outside the UK to my market place. We already suffer from 100% prepayments to suppliers and 45-60 day payment terms from Clients…
I’m an FD at one of the suppliers who have recently converted to 120day terms with Carillion. We do about £3m worth of business with them per annum, but are an SME who also work with other ‘large’ contractors.
Prior to the change, we were on 65day Month End terms with C which are pretty standard amongst our client base. They effectively made us the following offer:
1. Covert to 120day terms ‘on paper’
2. Provide access to their Early Payment Facility, allowing us to draw down payment as soon as the invoice is approved (they are taking around 30 days to do this at the moment).
3. We pay a charge based on the difference between payment date and 120days.
4. Carillion pay an ‘incentive fee’ (for some reason they cant call it a refund – something to do with the auditors) to us the following month – covering the cost down to 45days.
We were very sceptical in the first instance – they dont help themselves by being ‘wooly’ with their words and not calling a refund a refund.
However, having run with this for 3 months it’s fair to say we are now better off – typically drawing down between 45 and 50 days.
I’m not going to give them too much priase (they still have a long way to go to improve their invoice approval times and the RBS system is complicated to say the least), but I do think a lot of the negative press they are recieving is unfair – especially when we appear to be benefing from their initiative (for the time being anyway!).
Dear Anon,
Now I’m really confused! You sign up to 120 days, then you draw off at 45 days paying a charge for the “early” payment. Then the next month Carillion refunds the early payment charge. Have I got that right??
Correct. If you draw down any earlier than 45 days, then you foot the bill for the difference.
As I said, not easy to understand, but does work (and all 3 months worth of ‘incentive fee’ has been forthcoming).
Baffling. If Carillion had come out and announced that they were going to meet the costs for ensuring its suppliers got paid after 45 days they would have been seen as the golden boys of the industry and would be basking in the glow of tanker loads of positive pr. Has their handling of this been a pr gaffe of earthquake proportions? I doubt it, there’s more to this than meets the eye. Thanks for sharing though, much appreciated.
No problem. The supply chain guy who gave us the choice (stay on 65 or go to 120/45) said they were unable to publicise this as they are effectively funding the balance sheet via ‘the back door’.
Makes sense, as publically announcing you are paying for the priviledge would undermine any benefit of having a more attractive balance sheet.
Yes, that’s more like it.
My worry is that main contractors that don’t have access to an RBS type facility will now try to move to 90-120 day payment terms. Then the crap really will hit the fan! Thanks again.
I’ve had a bit of time to mull over Anon’s comments from last night.
If Anon is a legitimate poster, it does indeed seem that Carillion are refunding the reverse factoring charges for payments released as early as 45 days from month end. This is something that I have been advocating since the story broke. This is great news for Carillion suppliers who have previously been getting paid at 65 days from month end. So how has this turned into such a PR disaster for Carillion? Why not tell the world that they are meeting the RBS reverse factoring charges and that its first tier suppliers are now getting paid faster than ever?
The answer lies, perhaps, in Anon’s comment above – “The supply chain guy who gave us the choice (stay on 65 or go to 120/45) said they were unable to publicise this as they are effectively funding the balance sheet via ‘the back door’”
So lets recap and sum up what we know (working on the basis that Anon’s comments are factual):
1. Carillion has admitted that it is looking to gain more working capital flexibility. They will undoubtedly achieve this by holding onto client payments for as long as possible (preferably 120 days) before paying for first tier supplies.
2. Carillion suppliers are being given the option to stay on existing payment terms (typically 65 days from month end) or sign up to 120 day payment terms with an option to get paid by RBS after 45 days with Carillion refunding the finance charge levied by RBS. Seems like a no-brainer to me.
3. I’m therefore guessing that most Carillion suppliers are now getting paid by RBS as early as 45 days from month end with Carillion refunding to the supplier (in the following month) the RBS finance charges paid by the supplier in return for “early” payment.
4. Carillion then pays RBS after 120 days.
5. It would seem Carillion would prefer not to publicise the fact that they are refunding the RBS reverse factoring charges – calling the refunds an “incentive fee” instead.
Now I’m no expert but my guess is that:
1. Carillion has seen reverse factoring / 120 days payments as an easy opportunity to give it’s balance sheet a quick boost.
2. It has also headed off the immediate backlash from its suppliers by refunding the RBS factoring charges.
3. Carillion is not publicising that it is refunding the RBS finance charges as some may interpret this as a manipulation the reverse factoring facility to enhance its balance sheet. Personally, if RBS is prepared to reverse factor the Carillion supply chain and Carillion is prepared to pay / refund the RBS charges, I don’t see what the problem is. I suspect this is an audit / accountancy issue so I’m out of my comfort zone here, it would be great if an expert could chip in?
Am I being too cynical in feeling that the Carillion refunds might have a limited life? It may be that there will be a gradual phasing out of the refund payments to suppliers but for now (putting all the negative PR to one side) all seems to be sunny in the Carillion garden.
IF Carillion remains committed to footing the bill for the RBS finance charges over the long term then this is clearly a good deal for its suppliers and one which all major / main contractors (that can access reverse factoring) would do well to seriously consider. If, however, Carillion stops refunding the finance charges then this becomes an entirely different story.
Overall, I am still certain that the Carillion payment plan is setting a very dangerous precedent. If 120 day payment terms become the norm for all main contractors (particularly those that are undercapitalised and cannot access reverse factoring) then we are going to a very dangerous place indeed.
My view remains simply that tier one suppliers should be getting paid within 30 days from month end (60 days as an absolute maximum) and they should not have to pay for the privilege.
I wonder if their balance sheet is not quite as buoyant as they thought it was going to be given that Carillion managed to plan so far ahead on their cosy (as in insulation) collaboration with DECC, Birmingham Council and their own rather super Green Deal? Maybe.
Karma.
I love the money stuff Grant but still don’t understand, can you send me a drawing please?
A few updates:
Construction Enquirer Reports that “The National Specialist Contractors Council has called on Government to stop awarding Carillion contracts after it imposed payment terms extending to 120 days.” Read their article including an interview with Suzannah Nicol here.
Construction News also has the story, which includes a couple of statements from Carillion one of which reads,
“We are surprised by the NSCC’s comments, because we would have expected them to contact Carillion before making them. If they had done so, we would have explained how our early payment facility works and how it is benefitting our suppliers, as evidenced by the positive feedback we have received from suppliers, some examples of which are on our website.”
Read the article here. (not currently behind a paywall)
Meanwhile in a story this morning Construction Enquirer reports that:
“Project bank accounts will be trialled on Scottish public sector construction schemes next year in a bid to speed-up payments to subcontractors. The move could see suppliers paid within five days.”
And today Specification Online reports that
“Leading support services company Carillion, has been recognised with the highest ranking In Business in the Community’s annual benchmark of responsible business management, the Corporate Responsibility Index (CR Index).”