Clients will be encouraged not to give contractors work unless they meet fair payment standards under the terms of a charter to be launched this month.
The supply chain payment charter, agreed by the joint industry and government Construction Leadership Council, will encourage clients and contractors to sign up to 11 fair payment commitments, including standard 30-day payment terms from January 2018.
Firms that sign the charter will submit to monitoring to prove compliance.
This would include a client reporting its payment record against a set of agreed key performance indicators, and to “consider the performance of its supply chain against those KPIs when awarding contracts”.
Although voluntary, both clients and contractors are expected to pledge their support at an official launch event on 22 April.
Clients represented on the CLC include British Land, Network Rail and Sainsbury’s.
Minutes of the most recent CLC meeting in February, released to Construction News under a Freedom of Information request, revealed discussion of the merits of 30, 45 and 60-day payment terms.
The minutes said: “Many felt that it was important the leading firms in the construction industry should demonstrate their commitment to transforming the industry by signing up to a voluntary commitment to a ‘back stop’ in terms of maximum payment days.”
It was felt this could set an example and encourage other businesses in the industry to follow suit.
NSCC on improving payment:
NSCC chief executive Suzannah Nichol welcomed steps towards improving payment in the construction industry.
“A whole tranche of the industry wants 30-day payment terms and the sooner we can get there the better,” she said.
“Clients can play a big part in improving payment. If any contractors are not paying their supply chain within those terms, clients can choose not to give them work in the future.
“Any client would question, if they’re paying in 30 days, why is the cash not getting to its supply chain?”
Ms Nichol added that there would be an opportunity to address how the construction industry operates.
“We’ve got to rebalance the expectations of clients. We are all on the side of getting the best value for construction, and clients should pay the right price for buildings. I think there is a real opportunity for the whole industry to say, we build the entire environment we live in – we build schools, roads, hospitals, train systems – there is a value to that and a cost to that.
“Getting to a position where everyone agrees on improving payment would be a big achievement.There have been some very honest and productive discussions on payment and the Construction Leadership Council has allowed that to happen.”
The negotiations over the payment charter have been fraught. Institute of Credit Management chief executive Philip King first presented a draft payment charter to the CLC at a meeting in October 2013.
Minutes from that meeting showed it was agreed then that “reducing the actual payment period would be difficult, given the industry had grown up squeezing money from its supply chain, but it was necessary”.
It was also agreed that changing behaviour would be “better achieved [by] encouraging rather than enforcing” the new payment charter.
The minutes showed that the National Specialist Contractors’ Council and a delivery group had then prepared a new draft of the charter to present to the CLC in February 2014.
At the time, consensus had still not been reached on the final draft, and Construction News revealed last month fears that talks had reached a “sticking point”.
The payment charter commits firms to 30-day payment terms from January 2018. By June 2015 they would commit to payment within 45 day terms and would immediately implement maximum 60-day terms.
Electrical Contractors’ Association director of business services Paul Reeve said: “The initial payment terms in the charter won’t make much difference to suppliers, but it maps the way to 30-day commercial payment terms by 2018, so we are looking at a glass half full, and maybe even better than that.
“What matters is how clients behave towards those companies that don’t sign up to the charter. We would like to see prominent and positive publicity for the large businesses that sign up, and all-round criticism of those that don’t.
“But those that sign up should also be required to stay on board for the long haul.”
Other commitments in the charter include not withholding cash retentions, not delaying or withholding payment, and making payments electronically.
Concerns were expressed at the CLC meeting in February over retentions from housebuilders that “felt they needed a two-year retention, as this matched the guarantee they were required to supply to their customers”.
Skills minister Matthew Hancock this week said the government was still considering responses to its discussion paper on building a more responsible payment culture and will publish the response shortly.