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Incoming Kier CEO says firm will take £40m cash hit as 30-day terms 'become norm'

The Construction Leadership Council has reached a “sticking point” on the payment terms in private sector contracts in its new supply chain charter, Construction News has been told. 

Electrical Contractors Association director of business services Paul Reeve said a proposed supply chain charter was in “a very delicate place”. 

The charter has been drafted by the Institute of Credit Management and will tackle issues including prompt payment. It is due to be published this month. 

Thirty-day payment terms are expected on central government and public sector contracts but Mr Reeve said the terms being discussed for private sector jobs were 45 days, with a possible reduction by 2017. 

“The days of the past of 45 or 60-day terms are becoming less frequent”

Haydn Mursell, Kier group finance director

Kier’s incoming chief executive Haydn Mursell, speaking to Construction News after the contractor posted interim half-year results, said he expected Kier to take a £40m cash hit over the 2013/14 financial year as subcontractors on building jobs seek 30-day payment terms on contracts.

Mr Mursell said: “The supply chain are in a position where they have been suppressed and want better terms, and we are seeing that coming through in the public sector and on frameworks where 30-day terms, or similar, are becoming the norm.” 

He added that the industry was “entering a phase where there is a culture of just having explicit shorter terms within contracts… the days of the past of 45 or 60-day terms are becoming less frequent”. 

A survey of ECA members, shared exclusively with Construction News (see box), found that 30-day payment terms are still not being passed down to subcontractors. 

ECA members report late payment

In a survey of 168 ECA members:

26% typically received payment between 60 and 100 days when working for private sector end clients.

27% said payment terms on private sector jobs increased over the past 12 months.

35% were paid within 30 days on less than one in five jobs they carried out for central government end clients.

53% did not take action to recover unpaid invoices for fear of damaging business relationships and losing out on future work opportunities.

A BIS spokesperson said: “Where 30-day payment terms are not being passed along to suppliers working on public sector contracts, people can contact the Cabinet Office’s Mystery Shopper scheme. This provides a clear and direct route for suppliers to raise concerns about public procurement practice.”

The ECA is involved in talks on the payment charter through the Specialist Engineering Contractors’ Group, which has a representative on the CLC. 

Mr Reeve said: “If we have a charter, it must have sanctions, and no bullet holes or let-out clauses, because contractors will just steer around them.” 

Chief construction adviser Peter Hansford said in January it was likely that contractors would be asked to voluntarily sign up to the charter. 

National Specialist Contractors Council chief executive Suzannah Nichol said: “If everyone agreed to 30-day terms there wouldn’t be a problem. 

“Obviously people round the table do not think that is a way they can run their business.” 

The ECA is lobbying the government to legally require tier one contractors working for public sector clients to pay their supply chain within 30 days, and for those that fail to do so to be excluded from public procurement opportunities. 

It also supports the use of project bank accounts to ensure the supply chain is paid promptly. 

“If everyone agreed to 30-day terms there wouldn’t be a problem”

Suzannah Nichol, NSCC chief executive

Tier one contractors have told Construction News they are increasingly concerned about the government mandating the use of project bank accounts on public sector jobs. 

This week, a source said PBAs, used on high-profile schemes, would put pressure on main contractors’ cash reserves, forcing them to substantially raise prices on jobs to protect their own margins. 

However, Interserve chief executive Adrian Ringrose said he was not concerned about the shift in payment culture. 

He said: “Thirty days is not very different from what we have been doing. So it’s not significantly different in our world. 

“The change one or two are seeing is less profound for us than some of our peer groups.”

ECA members said:

“We’re lucky to get paid in 90 days on 90 per cent of jobs.”

“We don’t subcontract due to late payments, we only work directly for end clients.”

“Unless the client insists payment terms are passed down and audits it, this will never improve. The talk of codes of practice is a joke.”

“Central government project payments tend to be settled early. For NHS trust and schools or colleges projects, payment is always late.”

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