Fairer payment legislation tipped in Queen’s speech

Fairer payment legislation to enforce speedier payments along supply chains in public sector contracts could be laid down in the Queen’s Speech in June, say industry sources.

The Department for Business Innovation and Skills is understood to be considering the new legislation following a recent consultation on fair payment across industries which particularly highlighted payment issues in construction. Though public sector bodies are by law obliged to pay their direct suppliers within 30 days this could extend the 30-day obligation down the supply chain.

The legislation is tipped as the voluntary Construction Supply Chain Payment Charter was launched on Tuesday. Nine members of the 30-strong Construction Leadership Council, which formulated the code, signed up to the Charter, including Berkeley Group, Barratt Developments and Skanska.

The Charter sets out 11 “Fair Payment Commitments”. These include a commitment to reduce payment terms to a supply chain to 30 days from January 2018. The Charter also sets out stages before this: terms of 45 days from June 2015, and 60 days with immediate effect.

Other commitments made in the Charter include not withholding cash retentions, not delaying or withholding payment, and making payments electronically.

The Institute of Credit Management, will now lead work on the development of monitoring arrangements for the commitments made by signatories to the Charter.

However, members of the Specialist Engineering Contractors’ Group have called for radical measures to ensure the payment Charter has an impact. These include government writing to the top 100 clients urging them to get on board, and making signing up to the Charter a requirement for public sector work.

SEC Group, which has been heavily involved in the development of the charter, believes that the priority must be to ensure its implementation. Rudi Klein, SEC Group chief executive, said: “Given the fact that we have had many other initiatives aimed at curbing payment abuse, enforcing compliance with this Charter must be paramount. The measures we are calling for are essential if the Charter is to have impact.”

Klein is calling for an ombudsman who would intervene to oversee the process and intervene if firms were not complying. “We saw firms signing up to the Olympic commitments, but who paid any heed to that?” he said.

The late payment culture remains a concern for many small businesses, according to the latest research from the national small business group, the Forum of Private Business.

In the organisation’s latest banking and finance survey, 23% of members reported an increase in late payment over the past year compared with just 3% who reported a decrease. 29% have also seen an increase in the average number of days beyond the deadline that a payment is made late while 8% reported a decrease, and 19% have seen an increase in both elements of late payment.

Commenting on the results of the survey, Phil Orford MBE, chief executive of the Forum of Private Business, said: “Improving cash flow is the likely cause for late payment issues remaining static, despite lengthening payment terms. However, upwards of £30bn remains tied up in late payments, costing a typical small business 130 hours a year to chase and meaning that a third are forced to seek external finance to cover the gaps in cash.”

The government is mulling over responses to a recent late payment discussion paper, Building a Responsible Payment Culture, which put forward a number of ideas for tackling the issue in a more robust manner, including the reintroduction of compulsory reporting of company payment terms and practices, and annual checks for Prompt Payment Code signatories.

Meanwhile, responding to the new payment Charter, Chirag Shah, chief executive of Nucleus Commercial Finance, said that a defined payment term of 30 days would encourage both the “traditional” and “alternative” lending community to look again at an industry that has been starved of cash in recent years, despite a rising demand.

“Construction has been ignored by many lenders for being too high risk,” explained Shah. “Whereas some specialist lenders like Nucleus have dedicated finance products for the construction industry, the majority have opted to target other sectors with less risk.

“By bringing greater certainty to payment terms, however, I believe that those lenders may now be tempted back, which is good news for the lending community, but even better news for construction firms who will now have greater access to funding and greater choice.”

The construction supply chain charter – in full

Fair and transparent payment practices are essential to the achievement of successful integrated working on construction projects.

This Charter applies to all parties to construction contracts with the aim of helping to create a more collaborative culture and ensure a strong, resilient and sustainable supply chain.

This Charter builds on and complements existing legislation and policy, namely the Housing Grants, Construction & Regeneration Act 1996 (as amended); the Late Payment of Commercial Debts Regulations 2013; the Fair Payment Charter; Cabinet Office Procurement Information Note 2/2010; and the Prompt Payment Code.

By becoming a signatory to this Charter, an organisation agrees to apply the fair payment commitments in its dealings with its supply chain, to be monitored for the purposes of compliance by reporting against a set of agreed key performance indicators (KPIs), and to consider the performance of its supply chain against the agreed KPIs when awarding contracts.

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.

1) 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.

2) We will not deliberately delay or unreasonably withhold payment.

3) 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.

4) 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 .

5) 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.

6) We will issue any ‘pay less’ notices at the earliest opportunity and no later than 7 days prior to the final date for payment .

7) 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.

8) We will make payments electronically unless agreed otherwise.

9) 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.

10) 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.

11) We will adopt a transparent, honest, and collaborative approach when resolving differences and disputes.