New business secretary Sajid Javid has announced the creation of a new small business conciliation service to settle disputes. But with five other active payment initiatives in place, do we need another?
- Construction Supply Chain Payment Charter
- Project bank accounts
- Public Contracts Regulations 2015
- Prompt Payment Code
- Supply chain finance
- Small business conciliation service
- What is the solution?
One of Sajid Javid’s first actions on taking office as the new business secretary was to announce the introduction of a small business conciliation service.
Forming part of the government’s upcoming Enterprise Bill, the service will help settle disputes and “build on the existing suite of measures to tackle poor payment practices”.
This existing suite is already quite large, with at least five other initiatives in place to help combat late payment in construction.
But these are clearly not solving the problem. In the first six months of 2015, 133 companies fell into administration – including such big names as PC Harrington Contractors and GB Building Solutions.
While not all of these would have been caused by late payment, most will have been down to cashflow problems – with some companies perhaps surviving if they’d been paid within 30 days on all their contracts.
So where are the existing measures going wrong and will the latest government initiative make any difference?
Construction Supply Chain Payment Charter
Created by the Construction Leadership Council, which in turn was a core part of the coalition’s industrial strategy Construction 2025, the Construction Supply Chain Payment Charter is designed to introduce standard payment terms of 30 days with zero retentions.
The charter appeared in April 2014, with commitments taking effect from 1 January 2015, and it’s fair to say that it hasn’t fulfilled hopes.
“In terms of actual boots on the ground achievement, it’s been very, very disappointing,” says Electrical Contractors’ Association director of business services Paul Reeve.
A commercial director at a major subcontractor agrees, saying it has made “no difference, none whatsoever”.
The charter launched with nine contractors and clients from the CLC agreeing to support it, although there was much confusion over who had actually ‘signed’ it, and whether there was even anything to physically sign.
“I don’t think there’s any market compulsion to sign up to it,” Mr Reeve says. “It’s difficult to know how you sign up to it, that’s not clear.”
Our subcontractor describes it as a “quantum leap” for main contractors to sign up to.
He argues that it will reduce firms’ ability to manage cash in the way they do now, so that it “doesn’t make sense” for principal contractors to sign up.
One way to give it more teeth might be to monitor its implementation with KPIs, with the CLC supposedly developing monitoring requirements.
But this idea isn’t universally popular, with a director at one major main contractor expressing concern that any auditing in this way could create an extra administrative burden and another layer of cost.
He adds that, while in favour of shorter payment terms, main contractors should also be allowed the “flexibility” to use their own payment mechanisms within the frame of the charter.
The charter has set out solid principles of what good payment looks like, which should not be underestimated.
But it lacks teeth, is taking too long to implement, and has not made any practical difference to subcontractors yet.
Project bank accounts
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.
In theory, this process means two things: the contractor cannot hold onto money for any significant length of time; and in the case of a main contractor becoming insolvent, the tiers below will still get paid.
As of July last year, 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.
In 2012, the Highways Agency (now Highways England), one of the biggest government clients, was tasked with procuring £3.2bn of public work through PBAs, with the Roads Investment Strategy outlining further spending of £15bn over the next five years – all of which looks set to be paid through project bank accounts.
Certainly on big government contracts, then, they would appear to be here to stay.
The biggest criticism is that they add an extra administrative burden – something Highways England has sought to disprove but which remains a concern for main contractors.
“We don’t see a benefit in it at all,” says a director at one main contractor.
“We’re in an industry that’s short on resource on a good day, so we don’t want the QS messing about on this sort of stuff when they can do real cost reduction work.”
He also argues that on government contracts the contractor has to pay its suppliers within relatively short payment terms anyway, meaning they aren’t able to sit on cash for any length of time, rendering PBAs redundant.
Mr Reeve, however, argues that “lots more scope” should be given to PBAs – and that they could “absolutely work in the private sector, too”.
PBAs are mentioned in the CLC’s payment charter: “We will use project bank accounts on central government contracts unless there are compelling reasons not to do so and on other contracts where appropriate.”
But this clearly leaves a gap in the private sector, where PBAs have not been widely used to date.
Effective and almost certain to be used more and more on government projects. But some main contractors remain resistant and PBAs are probably not the silver bullet solution to the problem of late payment outside the public sector.
Public Contracts Regulations 2015
Updated earlier this year, the Public Contracts Regulations 2015 clearly state that all contractors must pay their suppliers within 30 days.
It has to be expressed in subcontracts and sub-subcontracts, and if not, the Public Contracts Regulations state that it will be an implied obligation.
In theory this seems to be a positive, setting out in very clear terms what good payment looks like on a government contract.
But an ECA survey in April found that building services contractors continue to receive late payments on public sector work, despite the requirement that tier one contractors pay their supply chain within 30 days.
It found that 89 per cent had seen “no improvement” in payment by main or higher tier contractors in 2014.
Despite the PCR being toughened up at the start of this year, a potential hitch is that they aren’t worded consistently with the existing Construction Act.
“They are aimed at all industry and are not specific to construction,” Mr Reeve says. “It tends to make it a bit more complicated for people to comply properly with it.”
The main issue is over when the 30-day payment period begins – under the PCR, it’s when an invoice is “valid and undisputed”, whereas under the Construction Act payment depends on the statutory payment notice procedure, with contracts containing a payment due date and a final date for payment.
The inconsistencies with the Construction Act notwithstanding, the PCR are a good thing – another clear demonstration by the government of what fair payment should look like.
“The commercial sector should take a good, hard look and question whether they are doing that as well,” Mr Reeve adds.
Prompt Payment Code
The Prompt Payment Code is a voluntary initiative administered by the Chartered Institute of Credit Management.
Signatories to the code commit to pay suppliers on time, give clear guidance to suppliers and encourage best practice.
The code does not lay down a certain payment timeframe (ie 30 days), but rather prompts signatories to pay according to the terms of their contracts.
A director at a main contractor says the PPC is similar to the Construction Supply Chain Payment Charter in principle: “I think, providing you have flexibility in how you deal with it, anything that directs people on how to pay is fine.”
However, as is the case with the payment charter, subcontractors fear that a voluntary code won’t make much difference.
“What happens if you don’t abide by it?” one commercial director says. “I imagine there’s not a great deal that will happen.”
Mr Reeve echoes this: “We’re so concerned about payment that we don’t think you can leave it to voluntary codes – it would be nice if you could, but our experience suggests it does not work.
“Too many people avoid them, and the people who avoid them are generally the people you’re trying to get hold of to pay promptly.”
Another admirable initiative that again lays out in clear terms what good payment looks like, but will a voluntary code make any practical difference? Probably not.
Supply chain finance
One of the more controversial initiatives, supply chain finance is used by a number of main contractors to provide their suppliers with early payments in exchange for a percentage fee.
Most major contractors now offer a version of this, including Balfour Beatty, Carillion, Kier, Willmott Dixon and VolkerWessels, while ISG, Galliford Try, Wates and others have experimented to varying degrees.
Carillion’s early payment facility is perhaps the most well-known scheme. Participant suppliers are required to adopt 120-day payment terms, but are able to access payments in advance of those terms for a fee.
In June this year, the firm revealed that 396 of its suppliers, including 150 SMEs, use its early payment facility, paying out nearly £977.6m through the scheme in 2014.
This year it plans to further expand the scheme, targeting £1bn to be paid through the mechanism – more than 50 per cent of its UK supplier spend.
This isn’t popular with some subcontractors, but many simply say they won’t work for any main contractor that offers it – especially now the market has picked up and they can afford to be choosier.
A director at one contractor offering supply chain finance says many suppliers value the flexibility it affords, with the majority not needing to get early access to cash.
Most who do, he adds, do so when they fail to receive payment from someone else – and find this financing option a useful safety net.
Mr Reeve suggests this is true, saying the ECA doesn’t object to supply chain finance in principle, because its members are sometimes happy to access cash earlier.
“What we do object to, though, is anyone extending their own payment terms and then delivering a short payment deal – that’s atrocious,” he says.
A commercial director of a medium-sized subcontractor says it depends on how you run your business – and what margin you make – as to whether supply chain finance is a good option.
“I wouldn’t do it, but I can see why some people would,” he says.
“Anybody who’s happy to let someone take their cash for 90 days isn’t necessarily a good business person for me.
“Having said that, they might have a ridiculous profit margin and so are happy for that to happen.”
Mr Reeve says: “What you don’t want, though, is someone taking their 90-day payment terms, bunging it out to 120 days and then saying, ‘By the way, if you want it in 90 days that’s 2 per cent’.
“That’s just outrageous and that’s what we’re resisting. Do we think it’s the best way forward? No, we don’t.”
Mixed – can be useful in some cases when used sensibly, but some contractors have been left open to accusations that they are taking advantage of suppliers by extending payment terms and then charging for early payment. Some find it useful, however.
Small business conciliation service
Announced by new business secretary Sajid Javid as part of the upcoming Enterprise Bill, the small business conciliation service will “help settle disputes between small and large businesses, especially over late payment practices”.
What precisely this will look like is not yet known – but confidence isn’t high for the scheme to succeed.
The subcontractor commercial director says: “I don’t see this working – who is going to sit and manage this process, and where do they come from?
“They’ll probably have worked for big corporations to start with, so there’ll be a bit of a bias.
“By the time you get to this situation, you’re cash-starved, so most will do a deal before it gets there.”
Companies are usually very reluctant to resort to legal action, both for cost and reputational reasons, so for any government-backed conciliation service to succeed it would need to be absolutely confidential and impartial.
“I’m not particularly enthusiastic,” Mr Reeve says.
“We don’t reject it, but most companies don’t like to go to law against their buyers and I don’t know if many will come to a conciliation service, either.”
Main contractors, likewise, would prefer to settle disputes long before they reach the courts, and the same would go for this conciliation service.
The best solution, the main contractor director says, is to talk.
“My advice to any supplier who has any problems getting paid is to very clearly, politely and without emotion, escalate it to a peer within the organisation they have a problem with – QS to QS, MD to MD, or CFO to CFO. A phone call is better than an email.
“I’d say 95 times out of 100, that sorts it – and if it doesn’t you probably have a bigger problem and you’re going to have to call the lawyers in anyway, and there’s plenty of legislation to cover that.
“If this gets people around a table, it could be a good thing – but we’ll have to wait and see.”
Pessimism abounds; for it to have any chance of working it would have to be seen to be completely fair by both sides, not take too much time to resolve, and be completely anonymous.
A long way to go before it’s an effective solution.
What is the solution?
What is clear is that, while there are a myriad of active initiatives designed to secure fair payment for suppliers, the problem has not been solved.
The fact that we have five, soon to be six, active initiatives in place shows that the industry hasn’t got to grips with the problem and that none of these measures are actually having the fully desired effect.
The government does seem to want to help small businesses and has been supportive of trying to tackle late payment, but with so many stakeholders involved it has been hesitant in taking decisive action.
Legislation is sometimes cited as the answer, with other countries such as Germany enacting stricter payment laws, but main contractors argue this isn’t the answer, as having flexibility is necessary.
It’s important to acknowledge, however, that positive progress has been made.
Even if the practical effects are yet to filter down to many in the supply chain, all of the various charters, codes and regulations have at least laid out what good payment practice looks like and provided a solid example to follow.
All parties are generally agreed now that 30-day payment terms are a good thing and worth aiming for.
But we’re still a long way from getting there – and stronger implementation of some of these measures, along with increased government support to give them more bite, will be needed to solve the problem.