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Huge prize on offer if we tackle payment once and for all

Rudi Klein

Given the recent Carillion saga, CN’s recent in-depth feature – Late payment: The state of the construction industry – has added resonance.

Carillion’s troubles have once again highlighted the precarious nature of the balance sheets among the top contractors. They demand bonds and the like from their supply chain, but do not offer security for payment.

“Just think about the impact this would have on the whole of the industry”

This was made clear in a study carried out by UCL for the government more than four years ago, entitled Trade Credit in the UK construction industry. It found that “tier one firms were found to be net receivers of trade credit, whereas tier two firms [providing the bulk of the value] were found to be large net providers of trade credit”.

CN’s latest survey, on behalf of Oracle TPM, provided further essential insight. The most telling statistic was that only 29 per cent of supply chain firms received more than 75 per cent of their payments within agreed timescales (some of which were up to 120 days).

Solutions overlooked

However, the reason why so many subcontractors look to legislation to resolve payment abuse is because the majority of the industry has so far ignored other ‘solutions’. The Construction Supply Chain Payment Charter aims to achieve 30-day payment for all parties by January 2018. But let’s not hold our breath.

There is another opportunity with the forthcoming review of the Construction Act to include the following provisions:

  • Mandate the use of project bank accounts for all contracts in the public sector. The government has said they are the most effective mechanism for fair payment, reducing payment times to 12-15 days, and they are already mandated in Northern Ireland and Scotland.
  • Place cash retentions in a ringfenced scheme (as in many other countries).
  • Mandate 30-day payments (as in Ontario, Sweden and Western Australia).

Gathering momentum

In doing the above, we won’t be alone. The Australian government, for example, is among those considering rolling out such measures.

Legislation is necessary to drive change in longstanding and embedded business models that remain wholly dependent upon supply chain funding.

Here is the prize. A small steelwork contractor has told me he will be able to double in size over a two-year period if he was to be paid regularly within 30 days. Just think about the impact this would have on the whole of the industry.

Professor Rudi Klein is a barrister and CEO of Specialist Engineering Contractors’ (SEC) Group

Readers' comments (1)

  • Mr Klein, highlights the persistence of long, unfair and unacceptable late payment schemes by many Blue Chip main contractors in construction.
    Most of the points he made have been aired previously over many years. This unacceptable practice of piling the greatest risk on the shoulders of the supply chain has caused the demise of some great subcontractors over the past years.
    The notable point of "prize" reaches beyond good economics to many main contractors. Those with intelligence and good common sense pay at 14 days. In turn they receive the best service, labour and trades to carry out their works. This is very evident by the cost of repair and snagging suffered by many main contractors.
    Mr Kline outlined proposals to instill confidence in our industry is correct and should be adopted now, not later. You have my total support sir.

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