Amid step-changes in construction methods, skills and technology, major contractors and clients came together to ask what it will take to digitise payment through the supply chain.
The industry stands on the cusp of major change.
From this month, companies will need to be using BIM as a matter of routine on the majority of centrally procured government projects to cut cost in design and construction. A looming skills crisis has meant that for offsite manufacturing, the time really has come.
And we could finally be cutting away at a cancer on the industry: late payment.
A suppliers’ market is helping drive the change, with tier one contractors and below becoming choosier about the work they do.
Project bank accounts are being used in billions of pounds-worth of government projects. Supply chain financing, which at first caused an outcry, is being accepted for providing certainty and control over payment times.
Can complete digitisation of payment be part of this jigsaw, further speeding up payment and offering transparency throughout the supply chain?
Passing on payment quickly represents a break with traditional business models in which contractors hold on to clients’ money rather than processing payment quickly.
Payment roundtable CN Textura Joe Martin Argent 042
A low-interest economy makes that less attractive and there’s also pressure from government to speed up payment – through procurement obligations and the Construction Fair Payment Charter.
As Build UK told Construction News in March, it plans to benchmark its members on their payment terms. The organisation will collate publicly available information on construction companies and publish it to compare performance, says chief executive Suzannah Nichol.
The move comes as the government will later this year force large companies to reveal payment practices under new legislation and help clients make decisions about procurement.
“People talk about low margins, but if you want good margins, you need high productivity”
Matt Perry, Land Securities
So are all the elements aligned for industry modernisation and greater efficiency? Can the industry finally leave its past behind and step into a modern new era?
These were among the questions and themes addressed when Construction News, in association with Textura, brought together some major contractors and their clients.
Clients and the need for fair payment
The clients around the table were unanimous in the need to support fair payment and for it to be passed down the supply chain.
It made good business sense to do so, they said. With the success of the project relying on the financial health of companies doing the construction work, anything that would reduce their risks also reduced the clients’ risks.
However, they had mixed views about ensuring whether it would ever be 100 per cent achievable. Some acknowledged that the more they dictated terms to the main contractor the more this was likely to have an impact on construction costs.
Payment roundtable CN Textura Matt Perry Land Securities 072
Land Securities project director Matt Perry said: “Projects are delivered by second, third and fourth tier contractors, so we are of course concerned with the health of those companies. It always strikes me as odd that some first tier contractors don’t nurture their supply chain more for that reason.
“The first tier contractor is primarily a project management function, which manages second and third tier suppliers to deliver construction projects. The health of that body of the industry is fundamental to their success, and fundamental to the success of our schemes as well.”
He added: “Projects suffer from low productivity if people aren’t getting paid. And I think that’s sometimes the point that’s missed in all of this. People talk about low margins, but if you want to make good margins, you need high productivity. Paying companies on time and creating a good working environment contributes to that.
“If there is a tier one contractor with a bad payment record, it would be a reason not to work with them”
James Pellatt, GPE
“It is only a short-term gain that you get from holding onto cash. I actually don’t think this issue is as prevalent on large construction projects as in the smaller projects. That often tends to be more where the problem lies.”
Balfour Beatty continuous improvement director Andrew Dodsworth agreed: “Coming from the major projects world, you wouldn’t see that. There are fewer subcontractors involved and the ethos is one of forming very good long-term relationships.”
He said Balfour Beatty has started introducing supply chain finance for suppliers and is also reducing the number of suppliers it works with from the current 11,000. “We are focusing on larger projects, and the quality of the supply chain is expected to come with that.”
Knowing your suppliers
Having a close relationship with suppliers was essential to making sure they got paid on time, it was agreed by the roundtable guests.
“We think about payment a huge amount,” said Great Portland Estates head of projects James Pellatt. “We offer a slightly different scheme: we pay twice a month, because the more you’ve got coming through your books the easier it is, especially as you’re coming out of a recession and you’ve got a probably unsympathetic banker to deal with.
“We make sure that we pay within 14 days, and we try to make sure that gets replicated down the line. We can’t enforce that, but we have a very good relationship with our tier two contractors.
“We interrogate them when selecting our main contractors. If there is a tier one contractor with a bad payment record, it would be a reason not to work with them.”
Payment roundtable CN Textura_Andy Cubitt Transport for London_CN076
His sentiments were echoed by Mr Perry of Land Securities. “We pay in 28 days and can on occasion pay faster. As to second tiers getting paid on time, we don’t know the terms between the first, second and third tier contractors.
“But we are very hands-on with our projects, and we would know very quickly if there was a problem, particularly with primary second tiers who we have a relationship with.”
Argent commercial manager Joe Martin concurred: “We have very close relationships with our suppliers, and we keep our ear to the ground. The guys on the workface are the absolute barometer of what may be happening with a main contractor.”
Enforcing fair payment
While the commercial developers round the table rely on relationships to ensure suppliers were treating their trade specialists well, the infrastructure clients like Transport for London and Heathrow have more formal procedures in place.
“Our main contractors have welcomed these audits – they say it has helped them improve their internal systems”
David Ferroussat, Heathrow
Heathrow infrastructure procurement director David Ferroussat said the airport had been operating an open book environment since the mid-1990s. “We know exactly what our main contractors are paying our second and third tier suppliers, and we also know how often they pay them as well.
“We’ll pay our first tier contractors within 30 days, using a system called Oracle via an e-invoicing platform, so we can track and monitor that. Up to 98 per cent of our suppliers are paid within 30 days.”
Heathrow also retains the right to audit its first tier contractors at any time. “We have an independent audit company who will go in and look at their accounts, at the costs and when the subcontractors were paid,” Mr Ferroussat said.
Payment roundtable CN Textura David Ferroussat Heathrow 079
“And the same company will also do what we call Industrial Relations audits as well to see whether they’re paying site workers in line with our IR policy. Our main contractors have welcomed this – they say it’s beneficial, as it has helped them improve their internal systems.”
TfL programme manager Andy Cubitt said his organisation also has a 30-day payment policy. “But I have a vision as to how we can get better value from the supply chain, and that is to push faster payment through that supply chain because I believe that efficiency will benefit everyone.”
As well as ensuring this happened, TfL also checks that everyone on site is paid a living wage. “If we found out they weren’t, then that would be a breach of contract and they would forfeit the contract.”
“If there was an easier way to do it electronically, which would mean there was a platform you could tap into, then obviously you’d go for that”
Pete Lambert, NG Bailey
NG Bailey commercial director Pete Lambert said providing performance data aspects like payment was not a burden. “There is a resource and a cost associated with that.
“If we know we’re going to do it, we’ll prepare for it and we’ll do it and comply with the clients. If there was an easier way to do it electronically, which would mean there was a platform you could tap into, that everyone could access, then obviously you’d go for that.”
Implications of fast payment on costs
While there was an agreement that fast payment terms should benefit all, some participants also raised the point that there needed to be greater acceptance that cascading fast payment would have cost implications.
If contractors were unable to make money from holding onto cash, this would mean they might need to raise prices – which they as developers wouldn’t necessarily be opposed to if it increased stability. They also flagged up, however, that contractors had their business models and it wasn’t always right to be interventionist.
“It’s a marmite subject. I understand why tier ones don’t like PBAs. Fundamentally it attacks their cashflow”
Rob Driscoll, BESA
One participant illustrated this, saying he had been initially outraged to discover new payment terms introduced by one contractor as part of a new supply chain finance operation. But on talking to their trade contractors, he discovered that it worked, in that it allowed them more control over their finances and greater payment certainty.
Are project banks accounts the answer?
Project bank accounts are an increasingly used financial instrument for ensuring fair payment on public projects, but they aren’t always popular with tier one companies, for obvious reasons.
A project bank account is a ringfenced account set up specifically for a project and funded by the client, with payments made to the main contractor and the supply chain simultaneously.
Payment roundtable CN Textura Joanna Sloane HS2 063
As of July 2014, the government announced that £5.2bn-worth of public contracts had been paid through project bank accounts – significantly more than the £4bn target for 2014 set in the 2011 Government Construction Strategy.
But as Rob Driscoll, head of commercial and legal for trade umbrella body BESA, pointed out: “It’s a marmite subject. I understand why tier ones don’t like them. Fundamentally it attacks their cashflow.
“However, we support them, as it’s a fairer way to disperse money, but we accept it’s not the entire answer.”
So what were HS2’s plans for their use?
“We’re committed to prompt and fair payment to the supply chain,” said HS2 supply chain manager Joanna Sloane. “Similarly to TfL, we’re looking to follow government guidelines and make sure we pay in 30 days, and where appropriate we cascade that through our contracts with tier one contractors to the supply chain as well.
“We are not currently planning to use project bank accounts. We are finalising our position at the moment, but we are intending to mandate the Construction Fair Payment Charter. And that’s based on feedback from the supply chain.”
Role of digitising payment
The government is determined to increase the industry’s productivity – a focus that was once again underlined in the recent publication of the 2016 construction strategy. One of the ways it is encouraging this to succeed is digitalisation of the business process.
“If the industry, like banking and retail, starts to realise what digital can do for it, I think we’d all become much more profitable,” Mr Driscoll said, pointing out that digitising the design and construction side using BIM needed to go hand in glove with digitising the payment side.
Paul Bamforth is the managing director UK of Textura, which has developed software for the construction industry to digitise supply chain payment and an accompanying early payment service providing supply chain finance.
Payment roundtable CN Textura Paul Bamforth Textura 060
He said contractors were increasingly buying into the idea. “We have met a few main contractors that will carry on in the way they are for the time being, who are partly waiting for the demand from the clients for clear objective data, reporting data and so forth, but I think it’s pretty clear that the market’s moving towards it.”
As Textura Europe sales manager Andy Lambert pointed out, having a financial portal that all members of the project can use provides clients visibility if suppliers down the chain aren’t being paid.
Cause for optimism?
There was much optimism around the table that the industry was changing for the better. But one barrier which many agreed needed addressing was the behaviour of the PQS.
“It’s becoming a bit of a potential sport around whether you pay the contractor this, or you don’t pay them that – at the end of the day it’s only an interim payment,” said one client.
“It’s amazing how many things are still done in this industry that can be done automatically, and which could help improve those relationships”
Paul Bamforth, Textura
“I think perhaps have that bun fight at the end of the project, but let’s keep the project running through prompt interim payments. I think the QS fraternity need to sit back and look at their behaviour a little bit in that respect.”
That aside, most of our participants saw a definite desire and an attitude for change in terms of payment at tier one level, which clients welcomed.
As Land Securities’ Mr Perry put it: “If one of your first tier contractors presents a transparent, robust payment system for their supply chain, that starts to negate one of the biggest risks on any project, which is supply chain insolvency. So the more care they’re giving to that aspect of the business, the more positively we view them.”
Paul Bamforth captured the mood of the evening with his summing up. “Relationships between people will always be of central importance to this industry, and technology will never take that away.
“But it’s amazing how many things are still done in this industry that can be done automatically, and which could help improve those relationships.”
Who took part?
- Paul Bamforth, managing director UK, Textura
- Andy Cubitt, programme manager, Transport for London
- Andrew Dodsworth, continuous improvement director for UK construction services, Balfour Beatty
- Rob Driscoll, head of commercial and legal, BESA
- David Ferroussat, infrastructure procurement director, Heathrow
- Andy Lambert, sales manager, Europe, Textura
- Pete Lambert, commercial director, NG Bailey
- Joe Martin, commercial manager, Argent
- James Pellatt, head of projects, Great Portland Estates
- Matt Perry, project director, Land Securities
- Joanna Sloane, supply chain manager, HS2
- Tom Fitzpatrick, deputy editor, Construction News (chair)