Last month the Cabinet Office unveiled plans to exclude suppliers with poor payment practices from winning major government contracts. But could this inadvertently increase the chances of main contractor insolvency?
The announcement will have caught the eye of construction industry’s c-suite, since so many of the UK’s main contractors do significant amounts of public sector work.
The proposal includes plans to exclude main contractors who adopt poor payment practices from winning public sector contracts, and to permit subcontractors to report poor payment performance to relevant public sector authorities. The use of project bank accounts on public sector contracts will also be considered.
This is the government’s latest attempt to clamp down on payment abuse in the construction industry.
For main contractors, the thought of their subcontractors reporting them for poor payment practice and disqualification from public sector tenders will no doubt fill them with dread.
As many will be aware, late payment for the supply of goods and services in the construction industry has been a serious problem for years.
There are many factors that encourage main contractors to protect their cashflow positions, by withholding payments from subcontractors and suppliers for as long as possible. This practice results in subcontractors adopting the same behaviours with their sub-subcontractors and suppliers and so on down the contractual chain.
“Perhaps the UK government needs to consider how industries beyond these shores are tackling the issue”
Payments within 30 days of works being carried out or of goods being supplied are therefore rare, and payments later than 120 days are commonplace.
Such late payment clearly puts a significant strain on subcontractors’ and suppliers’ cashflow, as they have to pay their staff and their overheads as well as meet their bank and other funding commitments while they await payments.
In recent years, the government has made some efforts to tackle the problem. However, the measures have only had limited success, and poor payment practice is still widespread throughout the industry.
However, the latest plans announced by the Cabinet Office seem somewhat half-baked. They do not address what will constitute poor payment performance under these specific proposals; is the making of a payment by a main contractor to a subcontractor 60 or 90 days after receiving the subcontractor’s payment application poor payment practice or acceptable behaviour?
Perhaps the UK government needs to consider how industries beyond these shores are tackling the issue.
For example, the government of Western Australia has legislated directly on the appropriate payment period, in its Construction Contracts Amendment Act 2016. This act lays down a maximum period of 42 days for a main contractor to pay a subcontractor. Other countries around the world, such as Canada and Hong Kong, are now considering following suit.
If payment beyond 42 days starts being regarded as unacceptable practice by the UK government, many main contractors who wish to win public sector contracts will have to seriously reconsider how they do business with their subcontractors and suppliers.
Their days of holding onto money and protecting themselves from cash shortages could be numbered.
Anthony Albertini is a partner at Clyde & Co