A two-pronged assault on late payments doesn’t guarantee any change, says Assad Maqbool.
Assad Maqbool
Hands up if you get paid in 30 days? Unfortunately, I don’t see many hands in the air. Whatever our reasons for working in the complex and entertaining world of construction, we need to be paid. More than that, we need to be paid on time to survive.
But now there are two new weapons in the fight for prompt payment. The Public Contracts Regulations 2015 (the PCRs), which implement the 2014 EU Public Sector Procurement Directive, came into force on 26 February, and we also have the Crown Commercial Service’s statutory guidance on the application of the PCRs in practice. But will they make any difference and do they make sense in the construction industry?
In the Construction Act, there already is more statutory intervention into payment than is found in most industries. That statutory regime derives from a policy objective to alleviate some of the poorer practices in our industry – including the potential threat of insolvency caused by non-payment by employers and Tier 1 contractors. The impact is particularly profound for SMEs with relatively low current assets to fund cash flow issues.
Payment within 30 days
But statute cannot always force behavioural change. There is a great deal of difference between a certain contractual mechanism and what happens in reality. The problem again at SME level is one of enforcement: is the upfront cost of adjudication going to be value for money and is a litigious reputation going to assist your company in winning business? For the same reason, enforcement of rights to interest under the existing Late Payment of Commercial Debt Regulations provides little comfort.
The PCRs have now introduced a new requirement that all contracts between a public body and a main contractor must provide for payment within 30 days of an invoice being undisputed.
Unfortunately, the way in which the PCRs are written does not seem to add very much in a construction context: the 30-day period for payment starts from “the date on which the contracting authority completes any process of verification that the invoice is valid and undisputed”; that process can happen right up to the last date by which any pay less notice may be issued. As this is ordinarily only a few days before the final date for payment, the PCRs themselves do not shorten the payment period.
"The problem again at SME level is one of enforcement: is the upfront cost of adjudication going to be value for money and is a litigious reputation going to assist your company in winning business?"
Equally, the guidance issued by the Crown Commercial Service is unclear in the context of a Construction Act compliant payment mechanism. First, the guidance says that “contracting authorities should verify invoices in seven calendar days of receipt”, which would give an employer much less time than the Construction Act scheme provides within which to verify any works carried out.
Then, the guidance echoes the PCRs, stating that “the 30 calendar days period starts on the date the contracting authority deems the invoice to be valid and undisputed” but also that contracting authorities “should verify, accept and pay within the 30-day period”. The two statements are contradictory.
Thankfully, the guidance itself notes that it has “been prepared to provide general guidance only” and “does not constitute legal advice”.
The PCRs, the government’s translation of an EU directive, also require that the main contractor ensures that its contracts with subcontractors contain similar provisions about paying within 30 days. But the 30-day payment obligation down the supply chain was not required in implementing the European Directive; the UK Parliament decided to “gold-plate” the implementation of the rules. Here, we can perhaps discern the influence of Lord Young, the prime minister’s enterprise adviser, who has worked to increase SME access to the market.
Again, subcontractors attempting to enforce payment under the terms of the PCRs will suffer from the same issue about what constitutes “undue delay” in verifying invoices.
In any case, is an equal imposition of time periods on main contractors workable? We already have legislation barring “pay-when-paid” terms, which no one will argue should be revoked. This already leaves main contractors with a cash flow risk – if a tier 1 receives a sub-contractor invoice, verifies it the next day and applies to the client for payment the following day, then it might receive payment on day 30 but have to settle the subcontractor invoice on day 28.
To afford the main contractor some ability to manage its cash flow, it would make sense to at least allow the main contractor sufficient time in the payment cycle to receive invoices from its subcontractors and then include those as part of its own applications for payment.
After all, cash flow is the business of main contractors as well. The balance sheet shift of imposing an immediate shortening of payment periods at subcontract level will squeeze main contractors to fund payments out of current assets or borrowing to make them.
However, if this shift is inevitable, one might argue that, in a rising market when order books and turnovers are improving, main contractors might now be in a better place to make such a change. Equally, the squeeze might focus main contractors on improving their cash management processes but it will come back, in particular, to shortening the time periods to recover debts from clients. And so the cycle continues.
Assad Maqbool is a partner in Trowers & Hamlins’ projects and construction department
