The financial turmoil that hit thousands of contractors when Carillion collapsed owing them money is just a symptom of the wider late payments crisis, a lobby group has claimed. “This sorry saga has laid bare the frailties of the Prompt Payment Code.  While it is fundamentally a good idea, it does not work when it is most needed,” said Mike Cherry, National Chairman of the Federation of Small Businesses (FSB).

The FSB first raised concerns about the bankrupt outsourcing giant in July, when it emerged that contractors and other small suppliers were being pushed into accepting 120 day payment terms from Carillion. The issue is not just with one company though, with FSB research showing that, on average, 30 per cent of payments are typically late while the average value of each late payment stands at £6,142.

As a signatory of the Prompt Payment Code (PPC), Carillion was supposedly committed to paying all small suppliers within 60 days, and not retroactively changing payment terms, however the sheer size of the company put them in the box seat. Cherry was scathing about this position, and called for reform: “Although they were signatories of the PPC, Carillion were able to use their dominant position to squeeze smaller firms to mask their own financial failings. This irresponsible behaviour has put many small businesses in jeopardy, with countless people fearing for their jobs,” he said.

Government must step in immediately to strengthen the PPC by making it mandatory for all FTSE 350 businesses and introducing a tough penalty regime for those companies flaunting the rules. Companies taking advantage of small businesses for their own gains should have no right to public sector contracts.”

The FSB has also called for reforms to the way funds are held in public sector projects, hoping to reduce the issue of late or non-payment. In a letter to Cabinet Office Minister David Liddington the Federation urged the adoption for all public projects of a practice known as project bank accounts. This model sees funds for paying contractors held in a trust, rather than by the primary contractor, meaning that small suppliers are protected from late payment of the collapse of the main outsourcer. Project bank accounts have already been adopted for the Crossrail project and by Highways UK.

Mike Cherry stressed that Carillion’s demise shows the unacceptable position of many contractors: “Carillion’s collapse is a watershed moment that cannot be ignored. Small businesses need to be given the confidence that a catastrophe of this scale cannot happen again.  Otherwise the post-Carillion legacy could be a public sector procurement programme that is small-business-free, further increasing costs and risks to the taxpayer,” he warned.

The government has talked big on protecting small businesses in the past year, toughening the PPC and appointing former MP and businessman Paul Uppal as the inaugural Small Business Commissioner. As contractors struggle to get hold of money they are owed by Carillion, now is the time for talk to turn to action.

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