The Construction Leadership Council has launched its supply chain payment charter with nine signatories from the council.
Clients Barratt Developments, Berkeley Group and British Land, and contractors including Kier, Laing O’Rourke and Skanska, are among the first to agree to sign up to the charter, which will reduce standard payment terms in the construction industry to 30 days by 2018.
But other organisations that have had representation on the CLC, including Crossrail, Midas Group, Network Rail and Sainsbury’s, have not yet agreed to sign up to the charter.
Institute of Credit Management chief executive and author of the new charter Philip King told Construction News: “Each have their own particular reasons for not [signing], but the leadership council’s position is clear it was a charter it was willing to put its name to.
“It takes a while for some organisations to change their business models and it is a case of how quickly they can do that,” he added.
Government chief construction adviser Peter Hansford said setting up the payment charter was a “two-or three-stage process”.
He said the next step was to establish a group to manage the wider dissemination of the charter and to develop monitoring arrangements for the commitments made by signatories over the next few months.
Mr Hansford added that there were no targets for the number of signatories to the charter, but that he hoped it would be adopted more widely.
Signatories to the charter
- Barratt Developments
- Berkeley Group
- British Land
- Imtech UK
- Laing O’Rourke
- Stanford Industrial Concrete Flooring
It sets 11 fair payment commitments, including to not withhold cash through the use of retentions. The charter also sets out commitments to pay suppliers within terms of 45 days from June 2015 and 60 days with immediate effect.
Other commitments by signatories include not withholding cash retentions, not delaying or withholding payment, and making payments electronically.
Sources have told Construction News that the impact of the charter will be to reduce the cashflow of main contractors, forcing them to increase their prices and charge clients more in order to continue to meet their business obligations.
Mr Hansford said it was “certainly not the intention to drive up costs”, with Construction 2025 setting out ambitions to reduce costs by a third.
Mr King added that it was too early to say what the consequences of reducing payment terms to 30 days throughout the industry would be.
He admitted that “some will have to look at their business models and that is right and proper, and I would expect them to manage it in the best way that they can”, and that the changes could “make clients more aware of what they are paying for”.
The charter requires signatories using supply chain finance schemes to agree to not impose fees or costs for receiving payment within the terms set out in the contract.
Mr Hansford and Mr King made it clear that contractors whose standard payment terms exceeded terms laid out in the charter, but offered early payment schemes, would not be compliant.
Carillion, which increased its payment terms for users of its early payment facility to 120 days last March, “would have to change its terms to comply”, Mr King said.
When 30-day payment terms take effect for signatories to the charter in 2018, Mr King said there would still be a place for supply chain finance, but only if schemes allow for accelerated payment ahead of the payment terms.
Fair Payment Commitments
We agree that on all new construction contracts from 1 January 2015 we will meet the fair payment commitments set out below.
- We will make correct full payment as and when due for all work properly carried out, or products supplied, in accordance with the contract. We will ensure any withholding of payment due to defects or non-delivery is proportionate, and clearly, specifically and demonstrably justified in line with the arrangements set out in the contract.
- We will not deliberately delay or unreasonably withhold payment.
- For all new contracts we will ensure that payments are made to our supply chain not more than 60 calendar days from the end of the Calendar month in which the work is carried out or products are supplied. From June 2015 we will ensure that payments are made to our supply chain not more than 45 calendar days from the end of the calendar month. From January 2018 that will decrease to not more than 30 days.
- Public authorities are already required to pay within 30 calendar days. On central Government contracts, payment will be made to Tier 1 within 14 days, to Tier 2 within 19 days and to Tier 3 within 23 days of the due date, which will be 7 days after the common assessment or valuation date established by the client in the Tier 1 contract.
- We will either not withhold cash retention or ensure that any arrangements for retention with our supply chain are no more onerous than those implemented by the client in the Tier 1 contract. Our ambition is to move to zero retentions by 2025.
- We will issue any ‘pay less’ notices at the earliest opportunity and no later than 7 days prior to the final date for payment.
- We will have processes in place to enable the effects of contract variations to be agreed promptly and fairly and payments for such variations to be included in the payment immediately following the completion of the varied works.
- We will make payments electronically unless agreed otherwise.
- 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.
- Where Supply Chain Finance schemes allowing members of the supply chain to secure earlier payment are offered, we will not impose fees or costs for receiving payment within the terms set out in the contract.
- We will adopt a transparent, honest, and collaborative approach when resolving differences and disputes.