Government legislation to reform payments between contractors could derail major PFI schemes, just as the Treasury is bidding to rescue the funding method through its £2 billion bail-out.
Many subcontractors could find themselves locked out of new PFI deals under the legislation being debated this week in Parliament.
Under proposed laws, the provision of a pay-when-certified clause – a payment provision which allows main contractors to hold off on payment – will be banned in a bid to provide smaller parties in the PFI process with greater certainty about what they will be paid and when.
The report stage of the bill started in the House of Lords on Tuesday after which it will be passed to the House of Commons for further debate.
Lawyers argue the impending laws – detailed in the Local Democracy, Economic Development and
Construction bill – would actually result in new barriers to entry into the market.
Partner and head of the construction team at law firm Weightmans Ed Lewis said: “Main contractors are not going to want to get into bed with any new subcontractors that may cause problems on a project. You can do what you like from a legislative point of view, but people will still work with those they trust.”
Taylor Wessing construction associate Brad Fearn agreed. He said: “Firms also want to be on projects [with subcontractors] they know have financial covenants and financial strength.”
Dundas & Wilson associate Davinia Cowden said the laws would also have a detrimental affect on special purpose vehicles.
She said: “It means they will be under obligations to make payments before it has sufficient cash; this not only puts the SPV at risk of insolvency but puts the whole project into jeopardy.”
Mr Fearn said: “It will definitely make firms look at how they price and how they arrange for interim payments in contracts.
“It will probably cause more innovation in ways to allow for those interim payments.”
Earlier this month, the UK Treasury announced plans for a £2 billion bailout of the troubled PFI sector to make up for a shortfall in cash coming from the private sector, which was described by Mr Lewis as “just PFI in a different wrapper”.
Norton Rose London banking associate Matthew Hardwick said it was “ironic” for the Government to unveil such a deal at a time when major changes to PFI were being debated in the Lords.
The Department for Business said in a statement: “It has never been our intention, when amending the Construction Act, to needlessly undermine the PFI, which has its own contractual processes. The issue has been raised with us by the PPP Forum and others and we will be having further discussions with them about their concerns.”
Industry raises tribunal fears
The construction industry is calling for a redrafting of the Construction bill to ensure it does not create an imbalance between large and small contractors.
Under existing regulations, the adjudicator in a dispute between main and sub-contractors can distribute his costs between the parties – usually about £8,000. The bill would mean the costs would be likely to fall on the subcontractor.
“With this bill, the adjudicator is not allowed to apportion the fee between the parties,” said Confederation of
Construction Specialists, legal spokesman Howard Klein.
“The cost of bringing a case to the adjudicator can be as much as £40,000. So this is a serious deterrent.”
Construction Industry Council adjudication board chairman John Reilly said the CIC will on Friday call for the reintroduction of the clause.
Amendments to the bill brought in by the Specialist Engineering Contractors group have caused a separate row over payments.
The SEC’s proposals have attracted little support, with the Construction Confederation opposing the moves and the National Specialist Contractors Council reserving its position.