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).
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).
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