Peter Vinden
Peter Vinden FCIOB says that the forthcoming Charter could transform the industry’s payment culture.
The Construction Leadership Council’s incoming Supply Chain Charter regulations are expected to enforce payment terms of 30 days in a bid to prevent late payments damaging UK subcontractors. The new rules under the voluntary charter will be introduced slowly, with 60 days expected on signing and an interim step of 45 days applying from June 2015, and implementation of the 30-day rule only expected in January 2018. Nevertheless, the Charter is a promising step towards reigning in the more slippery contractors and protecting SMEs.
The final publication of the Charter, aimed at clients and contractors in both the public and private sector, is not due until 22 April. However, a number of industry professionals are already noticing the positive improvements in regard to payment policies. Where larger contractors might previously have exhibited dominance over smaller subcontractors, keeping them waiting months for payment, the motion to limit this behaviour shows greater respect for SMEs and faith in the economy to support the predicted changes to payment strategies.
This is why the industry should welcome tightened restrictions on larger businesses and heightened insurance for smaller subcontractors. With housebuilding figures projected to rise over the next 12 months, there is a great deal of potential for businesses across the sector to thrive in the improving market.
Whilst the public sector has always been easier to regulate, this should not be an invitation to the private sector to occupy a legal grey area. Many are complaining about the impact that new strictures will have on their margins, when in fact all that the new regulations require is that companies remain transparent and that professional promises are kept.
"Many are complaining about the impact that new strictures will have on their margins, when in fact all that the new regulations require is that companies remain transparent and that professional promises are kept."
When this is considered, abiding by a 45-day limit for payments should not be difficult, as it is two weeks longer than the restrictions imposed on our public sector counterparts. Although this might be an alarming introductory measure for some major companies, it could stimulate substantial growth for subcontractors following a difficult few years.
Surveys have shown that 27% of subcontractors have seen their payment terms for private sector jobs increase in the last year, demonstrating the threat posed by the existing policies.
The implementation of project bank accounts (PBAs) on public sector contracts is another indicator of how seriously government is taking the issue, as PBAs will exert pressure on larger contractors to deliver prompt payments. This is indicative not just of a change in regulation, but also of an essential cultural shift for the construction sector. Although many would agree that the integration of new measures take time, this hopeful move towards changing standards and attitudes is a positive start.
Protestations from larger contractors that prices must now be raised substantially as a reaction to PBAs does not quite equate to the losses incurred by SMEs over the years as a result of late payments. Not only have subcontractors often been forced to close due to outstanding payments, over half of those surveyed admitted that they had allowed invoices to slide out of fear their partnerships with larger, more influential businesses might be damaged. It is this misuse of power that I hope will be obstructed by the new strategy.
As the economy begins its steady recovery, the government is directing necessary attention to supporting infrastructure projects and addressing the national housing shortage. This will present a variety of excellent opportunities to businesses of all sizes across the construction sector, and can revitalise an industry that has taken its fair share of knocks in recent years.
People will always look for ways to shirk responsibility for individual gain, which is why the Supply Chain Charter will work most successfully as a voluntary regulation. The Prompt Payment Code came under fire for not being strict enough, but what the construction sector really needs is willing participants in the new code of conduct. To achieve the best possible results from the opportunities currently presented, contractors need to follow best practice and understand the value of strong business partnerships.
If major contractors can take responsibility for reimbursing smaller subcontractors in a fair and timely manner, the overall sector will find itself in stronger stead for the coming years. Worthwhile business relationships prove valuable in the long run, and promoting respect and consideration of others will prove beneficial for both large and small companies.
Peter Vinden FCIOB, is managing director of The Vinden Partnership
