Last month’s arrival of new legislation strengthening contractors’ rights on payment ought to have been a cause for minor celebration in the industry. But with companies all along the construction supply chain experiencing payment stress of one form or another, will the Late Payment of Commercial Debts Regulations 2013 make a meaningful difference?
The difficulties faced by subcontractors are of course all too familiar. In effect, they often part-finance projects: if they supply material and/or labour to the site at the beginning of the month, the payment clock might only start ticking when the work is signed off weeks later. In construction contracts, the clock might then tick along happily for 45 to 60 days before the subcontractor receives any cash – if the main contractor keeps to the contract terms.
In good times, late payment is a serious problem, but an overdraft or other short-term lending would prevent it destabilising the business. But when banks can cancel borrowing facilities from one week to the next, it can make the difference between a viable business being able to trade and being forced into insolvency.
But now we’re increasingly hearing about main contractors’ payment problems. While they have played the system to their advantage – pulling in large initial payments from the client months before it has to leave for subcontractors’ accounts – the smaller value, shorter contracts they’re now taking on make this harder. Plus, on some major public sector contracts, the facility just isn’t available because of Project Bank Accounts.
The government’s Supply Chain Finance Scheme – of which Carillion has been a controversial “early adopter” – is one response. Its Early Payment Facility is billed as a low-cost alternative to loan finance to free up funds, but in effect it asks subcontractors to pay a small borrowing charge to access their own money: £15 for a £10,000 invoice paid at day 40 rather than day 65, for instance. However, in the current climate, it looks like the system will be popular with some suppliers.
Then there’s John Lewis, signalling that it would be prepared to step in and pay subcontractors directly if main contractors pay late. Presumably it’s hoping it won’t actually have to – for a client to get involved in sorting out what sums fall due when implies a whole new raft of responsibilities.
If more clients follow suit, it would create a climate where it’s unacceptable to pay late in the same way we think it’s unacceptable not to cut carbon emissions, or discriminate on grounds of age or gender – areas where legislation has to be backed up with behaviour change.
But the roots of this culture change were never laid in the good times, when the status quo worked well enough. Now, when the economy is bumping along the bottom, Tier 1s’ own cash-flow is critically stretched. For main contractors and subcontractors alike, payment stress is exposing fundamental flaws in the industry.
