Tier one contractors will be banned from using retentions and told to pay suppliers within 28 days of work being carried out, under a raft of changes by Network Rail.
Construction News can reveal that Network Rail will revamp its terms and conditions for all tier one contractors that win work in the £48bn Control Period 6, as part of a growing shift in public sector procurement.
It comes amid a growing industry debate over the payment of subcontractors in light of Carillion’s collapse.
Build UK and CECA have proposed abolishing retentions by 2023, while Peter Aldous MP has proposed a bill that would see a retentions depoist scheme established.
Under the new terms, all tier ones will be required to pay suppliers within 28 days of work, while cash retentions will be completely abolished.
Contractors that do not adhere to Network Rail’s terms will risk being in breach of contract.
Stephen Blakey, commercial projects director for Network Rail’s Infrastructure Projects division, told CN that action on payment and retentions was the “right thing to do” and he hoped it would encourage other clients to follow suit.
Other changes brought in by Network Rail include the introduction of project bank accounts for the first time, as well as more stringent financial checks on suppliers.
Speaking to CN, Mr Blakey said: “In a progressive way we will now hold our tier one contractors to account to ensure they meet the principles they have signed up to in our terms and conditions.
“What fixing our payment terms between tier ones and tier twos at 28 days will do is make the risk profile much more attractive for tier twos in rail than it would perhaps be in mainstream construction.”
Network Rail will procure work worth in excess of £48bn in CP6, which will run from 2019 to 2024.
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In 2011, it brought in the fair payment charter that called on companies to reduce payment terms from 56 to 28 days.
Mr Blakey said, that while the charter had improved the way Network Rail’s tier ones did business, it had been “imperfect”.
He said annual surveys carried out to assess uptake had often found that 30-40 per cent of its main suppliers weren’t consistently adhering to the charter.
The new terms were a “natural progression […] from an optional requirement” to something “fixed in Network Rail’s conditions”, he added.
“It sends a clear message to tier two suppliers that this has gone from a moral imperative that is voluntary, to something we now see as standard,” Mr Blakey said.
When asked what the penalties were for breaching the terms, Mr Blakey said no penalties had been agreed, but added that tier twos would be able to alert Network Rail to subcontracts that did not meet requirements.
The rail client also said it will carry out regular spot-checks on suppliers, with non-compliant firms having to explain their positions.
Network Rail’s ban on retentions comes amid growing support for reform throughout the industry following the collapse of Carillion.
Build UK and CECA have laid out plans to abolish cash-held retentions by 2023.
The Aldous Bill calling for new laws that place retentions in independently held protection schemes is currently going through parliament and has the support of 170 MPs.
Mr Blakey said Network Rail’s plan to tackle payment and retentions was “not a knee-jerk response to Carillion”, but agreed the liquidation had “re-ignited” industry-wide debate around the issues.
Carillion’s 120-day payment terms and early payment facility for its subcontractors have been widely criticised by industry leaders.
Mr Blakey said this was largely the experience of Carillion subcontractors in “mainstream construction”, but that in rail Carillion had adhered to its fair payment charter commitments in “most cases”.
He said: “In Carillion’s rail supply chain companies were not presented with 120, 140 or 160-day backlog of monies owed, meaning it was a much shorter and more manageable tail of debt.
“While it was painful for them, it would not destroy them.”
Mr Blakey said the client had learned lessons and implemented several changes to mitigate the impact of similar situations.
These included more stringent financial checks on its tier one suppliers.
Historically Network Rail would only do a financial assessment of a company at the point of contract award, and would not check again throughout the life of that contract.
Mr Blakey said: “Now we will be checking those suppliers a minimum of once a year, but in some cases there may be quarterly assessments where required.”
CP6 will also see the first project bank accounts being used in the rail sector.
Mr Blakey said: “Strategically we have decided to add provision in our terms for CP6 so we can establish project bank accounts if we want to.”
He added that there was not always a need to use project bank accounts, but the procurement route could benefit Network Rail in the delivery of its complex alliances.
Network Rail will introduce its first pilot project bank account scheme on the former Carillion Powerlines electrification contract in the East Midlands.
Mr Blakey said the pilot would be used to improve expertise in utilising project bank accounts in Network Rail, and the body had enlisted the help of Highways England to assist them with the implementation.
The move by Network Rail has received support from its tier one suppliers and industry figures.
Colas Rail chief commercial officer James Quinnell said the firm welcomed Network Rail’s desire to “contractualise this commitment across its supply chain”.
Civil Engineering Contractors Association chief executive Alasdair Reisner said: “Real change in industry requires real leadership.
”Network Rail has worked with its suppliers in a managed process to roll out prompt payment and is proving that, where there is a will, clients and industry can work together to axe unwanted and costly retentions.”