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Payment needs modernising

Repeated failures to tackle the issue of late payment could derail the government’s ambitions to modernise construction, says B&ES president Andy Sneyd

The government’s Construction 2025 strategy set out praiseworthy targets for our industry. We must deliver projects faster, cheaper and to a higher standard – and we have no problem with that. It is what any modern industry should aspire to achieve.

The question is – how?

Specialist subcontractors are key to the successful delivery of projects because they have the skills needed to make increasingly sophisticated building engineering systems work.

However, to meet the targets they need to be able to invest in training and development to keep up with technological developments and new ways of working.

The digitisation of the construction process is also a key plank of the modern supply chain.

Modern ways of working include the use of Building Information Modelling (BIM) and the more collaborative supply chains needed to work in that environment.

We are happy to be part of that too. In return, surely it is not too much to expect public sector clients to pay their subcontractors on time – or, where they are part of a supply chain, to make sure payments filter down properly, so that smaller contractors in particular get the cashflow they need to secure jobs and continue developing their workforce.

It is, therefore disappointing, to say the least, to learn that more than one in three public sector clients are failing to pay first-tier contractors within 30 days of being invoiced in line with the government’s own fair payment rules.

The Specialist Engineering Contractors’ (SEC) Group discovered the worrying statistic that 38 per cent of councils, universities, emergency services and NHS Trusts are falling foul of late payment legislation.

The SEC used the Freedom of Information Act to uncover uncomfortable truths about the way small firms in the construction supply chain are being abused and forced, in effect, to bankroll projects.

A massive 90 per cent of clients who responded to the SEC investigation also admitted to holding cash retentions. This can lead to subcontractors waiting months – even years – for the final settlement of an account. As a result, many face serious financial hardship – even collapse.

The SEC Group is calling for all payments for public sector construction work to be settled within 30 days and for organisations who fail to pay their supply chain on time to be barred from public sector contracts.

“There is an expectation that construction SMEs will invest in skills and training and smart technologies with the efficiencies thereby created directly benefiting the public sector,” says SEC Group boss Rudi Klein.

“But this is not achievable unless robust measures are adopted to improve cashflow throughout the supply chain.”

Unethical practice

Oldham East and Saddleworth MP Debbie Abrahams, who is spearheading a parliamentary campaign to tackle late payment, believes unfair payment practices are as unethical as tax evasion.

“The public sector should be setting an example in how to manage and treat its construction supply chains and should be the foundation on which we build a fair payment culture in this country,” she says.

The Cabinet Office is responsible for the implementation of fair payment practices across government departments, but a recent report from the National Audit Office (NAO) revealed that, as well as failing in that task, it was also one of the worst late payment offenders.  Only 25 per cent of public bodies in England even monitor their payment record, according to the NAO.

Central government spends around £40bn a year on goods and services, of which about £4.5bn is spent with SMEs. The NAO found that the four departments they audited were taking between 21 days and 49 days to pay 80 per cent of the value of paper invoices.

Government suppliers could benefit from reduced interest costs of up to £88m a year if government departments made their payments within five working days, the NAO found. Just think what building services companies could achieve with that money – money that is rightfully theirs.

Without security of payment and regular cashflow, specialist contractors simply cannot invest in the necessary skills required to improve and modernise; and, as the economy continues to pick up, the acute shortage of specialist skills will become increasingly problematic.

A recent survey by construction consultancy AECOM shows that contractors are not even bidding for at least 30 per cent of projects in the London area because they think the client is adversarial or otherwise ‘risky’ to work for – eg they are unlikely to pay on time.

Quality, competent specialist firms simply don’t need to chase work because there has been a significant turnaround in supply and demand – those with the right skills are now holding the whip hand. They have the vital added-value needed to meet rising client expectations and to deliver high quality, modern buildings.

This, then, is the time for us to force change and ensure that the value provided by specialist contractors is properly rewarded.

Unfortunately, while payment retentions might be a peculiarity of the construction industry, we cannot simply expect clients to sanction their abolition unless we offer other means of reassurance.

Archaic system

Retentions are a legacy of the mistrust that has been a sad fact of life in our supply chain for decades and are the client’s protection against the incompetent and unscrupulous. If a firm is capable of delivering on its promises; performs to professional standards and communicates clearly with its supply chain, then there is no reason to withhold payment from them.

Sadly not all contractors are like that.

This was a key driver behind the establishment of the B&ES Competence Assessment Scheme (CAS) – originally called Inspection & Assessment (I&A) – where all member companies have their professional and commercial competence regularly assessed and verified by a third-party inspector. Passing this process is a condition of membership.

B&ES members are able to provide proof of competence and, therefore, can justifiably argue for fair treatment when it comes to payment – so long as they continue to maintain high standards for their clients.

Any professional company that has made the necessary investment in staff competence and training deserves to be duly rewarded – those that haven’t and are prepared to deliver a sub-standard service do not; and clients need protecting from them.

The SEC Group, of which B&ES is a member, is arguing for a modernisation of the payment process that would sit alongside the wider modernisation of the industry required to deliver improvements the government wants.

The retentions system dates back more than 150 years and is clearly outdated, but we have to give clients a new form of security that also frees up the supply chain to perform.

By placing project payment money ‘in trust’ ie a separate bank account managed by a third party not involved in the contract, we can ensure that those at the top of the chain withhold do not money from those further down.

The H&V News Time for Change campaign supports this position and has the full backing of the B&ES. The campaign seeks to force a parliamentary debate about the issue of placing retention money in trust.

This is a crucial change that would, at a stroke, remove the commercial advantage gained by those who currently hang onto retentions as a means of funding their own businesses at the expense of their suppliers. As the money would no longer sit in their bank accounts, there is no benefit to be gained from prolonging, unfairly, the process of releasing payment.

However, the use of a trust means payment would also not be released until the contractor had met their quality obligations and completed work satisfactorily.

This approach, as well as supporting supply chain modernisation, will also help to get rid of those companies and individuals who give the whole sector a bad name and are the reason we continue to be dogged by these archaic practices.

Such firms could not survive in the more transparent supply chain environment that will have to prevail if we are to deliver better buildings.

Andy Sneyd is president of the Building & Engineering Services Association (B&ES) and head of design at Crown House Technologies

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