Supplier payment terms and the early payment facility

analysisAccording to the House of Commons committees, the construction trade body Build UK estimated that Carillion's supply chain spanned 30,000 companies when it collapsed. Carillion signed the Government's Prompt Payment Code in 2013, under which signatories should pay 95% of invoices within 60 days unless there are exceptional circumstances and work towards 30-day payment terms. The committees reported that in 2016 the Federation of Small Businesses protested to Carillion on behalf of suppliers waiting up to 126 days for payment, and concluded that late payments, routine quibbling of invoices and extended delays across reporting periods were company policy. The former directors' evidence and Carillion's own figures differ from that characterisation. Richard Adam, Richard Howson and Philip Green told the committees they did not recognise cases of suppliers waiting 120 to 126 days; Emma Mercer said 'a few outliers' of 'about five per cent' of the supply chain were paid after more than 120 days and 'less than ten per cent' waited 60 days. Carillion told the Cabinet Office that in the first five months of 2017 it paid suppliers on average 45 days after the invoice date (33 days from receipt of a validated invoice), with almost one third of invoices paid more than 60 days later; the Cabinet Office told the National Audit Office (NAO) it was unable to verify this. In April 2015 Carillion had told the Cabinet Office that it was paying sub-contractors on government contracts within 30 days. When the company collapsed, the committees reported, suppliers left unpaid for goods and services supplied before the collapse were, in the vast majority, uninsured and had joined the long list of creditors unlikely to see anything they were owed. ^{1 2}

analysisThe House of Commons committees reported that Carillion was a founding participant in the Government's Supply Chain Finance Scheme announced in 2012 and, shortly after its launch, changed its standard payment terms to 120 days; suppliers could sell their invoices at a discount to Carillion's bank to receive payment after 45 days, while Carillion reimbursed the bank only when the standard terms expired. Emma Mercer accepted that suppliers were asked to sign up to 120-day terms with an early payment facility (EPF) option, which she called 'supply chain factoring', and said the EPF was used to avoid 'damaging our working capital'. The committees concluded that suppliers 'could be paid in 45 days, but had to take a cut for the privilege'. Richard Howson disputed that characterisation, writing that it was 'just not correct': the EPF let suppliers choose when to take payment on approved invoices, at no cost to themselves at 30 days on government contracts and 45 days on non-government contracts, the bank deducting interest for which Carillion made the supplier whole, and the 120 days in the contract 'effectively set the time period with which Carillion paid its EPF partner banks, not the time period it took to pay its suppliers'. EY described the platform as allowing suppliers to draw down funds in line with agreed terms at no additional cost, or earlier at an additional cost. In the liquidation, the committees reported, the Official Receiver had reduced payment terms for goods and services provided during and for the benefit of the liquidation to 'there or thereabouts, within 30 days of invoice rather than the 120 days' the committees had heard of. ^{1 2}

analysisThe committees reported that Vaughan Engineering Ltd, which employed around 200 people providing mechanical and electrical building services on large commercial projects and had worked extensively with Carillion over the previous decade, complained of 120-day standard payment terms that could only be circumvented through the early payment facility, delays in certification of payments and unsubstantiated counter-claims, and believed it was owed £830,000 by Carillion, which left it unable to cover its liabilities. That is Vaughan Engineering's own account as reported by the committees; the claimed debt is the company's belief, not an adjudicated amount. Vaughan Engineering filed for administration on 28 March 2018, one of the first companies hit by Carillion's collapse according to the committees, and described that collapse as the principal factor in its downfall, while also citing contract disputes with other contractors and inadequate Government support after Carillion's insolvency. ¹

analysisResponding to the committees' joint report, the Confederation of British Industry called Carillion's payment practices, 'which included extending terms of up to 120 days and charging a fee for early payment', 'indefensible', saying they let Carillion hold on to cash for longer while transferring financial risk to its supply chain and putting smaller firms under pressure; the Institute of Directors noted concerns that Carillion had signed the Prompt Payment Code but did not follow the commitment to pay 95% of invoices within 60 days and to aim towards 30-day terms; and the Federation of Small Businesses agreed that the code was 'clearly ineffective in the case of Carillion'. These are views of business organisations submitted to the committees, not findings. Carillion's annual reports described the EPF as paying suppliers at least on their previous terms and often earlier at no cost to them, and Richard Howson wrote that suppliers could be paid without cost at 30 or 45 days and that, as regards late payment, 'this problem starts at the top', with the Government and public-sector customers' administration of payments to contractors. ²

analysisCarillion's 2014 annual report stated that its Early Payment Facility, introduced at the beginning of 2013, paid all suppliers on at least the same terms as before they joined and in many cases up to 20 days earlier at no cost to suppliers, and that it was used by 396 suppliers, with payments of £977.6 million made through it in 2014. Its 2016 report described 'prompt and fair supplier payments through our Early Payment Facility, which 85 per cent of our suppliers would recommend to others', with 55 per cent (2015: 58 per cent) of external expenditure with local suppliers and SMEs. A trade-press report of 16 January 2018 stated that about a third of Carillion's £1.5bn debt to banking partners was 'reverse factoring', a liability of about £500m accumulated under the Early Payment Facility introduced in 2013, under which the banks paid suppliers first and recovered the capital from Carillion; that RBS, Barclays, HSBC, Lloyds and Santander UK were owed around 60% of the company's debt; that the maximum payment term had been increased from 65 to 120 days; and that in a July 2017 update Carillion put EPF utilisation at £412m, 6% up on 2016, when Keith Cochrane told analysts the company would seek to reduce its reliance on reverse factoring. That is non-official reporting: the banks' shares of the debt and the £1.5bn figure are not confirmed in the official records retained, and the committees give different EPF figures (access up to £500 million and drawings of around £350 million at the collapse; £472 million drawn according to audit committee papers). In its interim results of 29 September 2017 Carillion stated that the EPF continued to be very attractive to suppliers and had significant benefits for Carillion, which therefore intended to retain an EPF but over the medium term to work towards reducing the period within which it paid its partner banks, which would reduce the cost of the facility. ^{1 2 3 4}

analysisAccording to the House of Commons committees, when Carillion collapsed it had access to credit of up to £500 million for the 'early' payment of suppliers and was drawing around £350 million, and the credit rating agency S&P Global told them that 'the lack of transparency concerning Carillion's reverse factoring practices likely obscured its weak balance sheet and cash flow position'. The draft independent business review prepared by FTI for Carillion's lenders, commissioned in October 2017, described a further c.£250m to £300m of 'core debt' accumulated through off-balance-sheet supplier financing (EPF) arrangements that extended payment terms on the supplier base from about 30 days to about 120 days. These are characterisations by a credit rating agency and by the lenders' adviser in a draft review; the Financial Reporting Council (FRC) said it could not determine whether Carillion's accounting for the facility met its expectations without further information. Former Carillion directors told the NAO that the practices FTI listed, including the use of early payment facilities to improve supplier payment terms, were in accordance with accounting standards or had been appropriately disclosed in the accounts, excepting only the securing of large advance payments on new contracts. ^{5 6 7}

analysisThe House of Commons committees reported that the credit rating agencies Moody's and Standard & Poor's argued that Carillion's early payment facility created a financial liability to the banks that should have been presented as borrowing rather than as liabilities to 'other creditors'; Moody's claimed that as much as £498 million was misclassified, while Carillion's audit committee papers show £472 million drawn. Moody's also found that between 2013 and 2016 Carillion reported operating cash inflows of £509 million against group operating profit of £501 million, but that reclassifying £472 million of EPF inflows as financing would leave only £37 million (7%) of operating profit cash-backed. The committees noted that Carillion's financial statements did not highlight the EPF, the only reference in the 2016 annual report being in the strategic report. These are the rating agencies' assessments as reported by the committees; the FRC would not confirm whether it agreed, noting that the precise terms of an arrangement dictate how it is accounted for. In a letter of 21 March 2018 to the committee chairs, sent under its chairman's covering letter, the FRC wrote that Carillion's accounts provided 'no significant material disclosures' on its use of reverse factoring, so that it was 'impossible to determine, at this stage, whether Carillion's approach was in line with our expectations'; derecognition of the original trade payable might have been appropriate with the replacement liability still shown within trade and other payables, depending on the terms, but conclusions required information on the facility terms and would not be drawn pending its investigations. The FRC explained that the 98% figure cited by Moody's compared the increase in other creditors with net cash inflows from operations, and that the arrangement did result in Carillion retaining cash for longer, which was not apparent without disclosure; it stated that its review of the December 2015 and December 2011 accounts had not raised reverse factoring because no question of non-compliance was apparent, and that its Enforcement Division investigation would consider whether the accounting treatment adopted was appropriate. Richard Howson maintained that the 120-day period governed Carillion's payments to its EPF partner banks rather than to suppliers. The FRC's October 2023 findings on KPMG's 2016 audit included breaches concerning Carillion's reported debt and going concern, 'including consideration of Carillion's use of a supply chain finance facility'. In May 2026 the FRC announced that the former finance directors Richard Adam and Zafar Khan had accepted misconduct, each admitting recklessness and a failure to act with integrity, in respect of areas including a supply chain finance facility, which the FRC described as material to Carillion's reported financial performance in one or more years between 2013 and 2016 or the 2017 half-year. ^{1 2 3 4 5}

analysisThe committees stated that presenting EPF drawings as 'other creditors' excluded them from total debt and so from the net debt to EBITDA ratio, a key covenant test between Carillion and its lenders; Carillion announced in its third profit warning on 17 November 2017 that it was likely to breach that covenant, and the committees considered that, had £472 million been classified as debt, it would most likely have breached the test far earlier. That is the committees' analysis and depends on the contested classification of the EPF liability. According to the committees, Carillion's board minutes of April 2015 had described as 'disappointing' an analysis by UBS that included both the pension deficit and the EPF in Carillion's total debt position, and the May 2015 minutes noted that short-selling of Carillion shares was up significantly, with the 'bulk' having 'followed the UBS note in March'. ¹

analysisThe committees reported that after the July 2017 profit warning EY oversaw 'Project Ray', a transformation programme for which Carillion paid it £10.8 million over six months, partly to identify up to £123 million of cost savings; EY also helped negotiate the pension trustee's deferral of £25 million of deficit recovery contributions and an October 2017 'time to pay' arrangement with HMRC deferring £22 million of tax. EY stated that its role was to support management in reorganising the business and reducing costs, to identify ways of improving cash flow and to help prepare the financial model used for the five-year business plan presented to creditors, and disputed the committees' description of 'six months of failed turnaround advice'. On 12 January 2018 Carillion paid advisers a total of £6,396,141, including £2,508,000 to Ernst & Young, £1,196,093 to Slaughter and May, £1,018,666 to FTI Consulting, £276,000 to PricewaterhouseCoopers and £78,000 to KPMG. ^{1 2}

analysisThe committees reported that in the company's final months Carillion considered a proposal by its restructuring consultants, EY, to extend standard payment terms to 126 days as an untapped 'cash generative opportunity'. EY disputes that the suggestion concerned suppliers generally: it wrote that the suggestion was not made for all of Carillion's suppliers but was confined to four larger suppliers already registered on Carillion's Supply Chain Finance platform on non-standard 120-day terms, for whom it recommended that Carillion consider applying its current standard terms of 126 days, and that this did not materially disadvantage those suppliers as regards the timing of their access to cash. Carillion's January 2018 group business plan assumed, for its Building segment, that the early payment facility would cover about 81% of supplier payments with a 'continuing benefit from 126 day payment terms', and projected EPF use in Building falling as volumes declined, to be broadly compensated by onboarding additional suppliers in services. ^{2 3 4}