The success of the new Supply Chain Payment Charter announced this week by the Construction Leadership Council rests on how well it is enforced, says Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group.
Commenting on the Charter’s commitment to reduce payment terms to the supply chain to 30 days from January 2018, Klein said: “If the Charter is to deliver change (rather than being simply aspirational), then compliance and enforcement are essential.
“I believe there should be a ‘yellow card/red card’ system operating in the public sector. If there is non-compliance with the Charter the offender should be warned and required to comply. Failure to heed the yellow card should result in a red card, which means that the offender will be disqualified from working in the public sector for two years. If a firm has not signed the Charter it should not be able to pre-qualify for public works contracts.”
"If there is non-compliance with the Charter the offender should be warned and required to comply. Failure to heed the yellow card should result in a red card, which means that the offender will be disqualified from working in the public sector for two years."
Rudi Klein, Specialist Engineering Contractors’ Group
Philip King, chief executive of the Institute of Credit Management, is currently working on the development of monitoring arrangements for the commitments made by signatories to the Charter, due to be published on 22 April.
Early signatories are expected to include major clients and contractors represented on the Construction Leadership Council, including Barratt Developments, British Land, Sainsbury’s and Berkeley Group, as well as Kier and Laing O’Rourke.
Despite the number of major clients on the Construction Leadership Council, Klein believes that the private sector will be a lot more difficult to police than the public sector. He suggests that Vince Cable – as co-chair of the Construction Leadership Council – should write to the top 100 private sector clients to invite them to sign the Charter and enforce it along the supply chain.
Klein supported the Charter’s aim of getting rid of retentions, by a deadline of 2025. However, he was not absolutely convinced that this would happen across the board, suggesting that the UK industry would need legislation – as exists in other countries – to protect each return. “If you require a cash retention you should issue a bank guarantee to ensure that the cash is available when it is due for release,” said Klein.
The full Charter is due to set out 11 “Fair Payment Commitments”. As part of the 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 mentioned in a press release from BIS this week include not withholding cash retentions, not delaying or withholding payment, and making payments electronically.
Any organisation that becomes a signatory to the Charter 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 those KPIs when awarding contracts.
Despite a number of main contractors looking to support fairer payment practices, overcoming the industry’s age-old late payment regime will be a challenge to many contractors’ business model.
A government-commissioned study last year by Graham Ive and Alex Murray of the Bartlett School of Construction and Project Management, UCL, revealed that most main contractors are under-capitalised, forcing them to retain cash flow for as long as possible.
They reported: “Construction firms take much more trade credit from their suppliers (two to three times as much, depending on the measure used) as a proportion of their balance sheet than do firms in the rest of the economy. They also give much more credit to their customers as a proportion of their balance sheet.”
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Has this been planned properly?
It all sounds good in theory but in practise might mean a disaster: e.g. that is until a large main contractor, who may have several on-going government schemes gets accused and held up having failed to pay a minor supplier – one could envisage an argument concerning details of an exact payment. Then let’s say the main contractor is unfortunately found guilty and given the red card; disqualified for the requisite two years; stops all work; then do all his on-gong government contracts get terminated automatically!
Throwing many other lower tier suppliers out, consequently disrupting a large number of projects albeit halting variations and or contract extensions of work etc.,, laying off many; causing mid contract delay and disruption all over the place.
Was/is this policy thought-out or just concocted by a number of amateur football enthusiasts, who clearly think everything is just some kind of a game?
Look how badly the Footballing Associations deal at present with very simple matters in comparison with construction contracts. They are hardly a good example to follow. Referees mess-up over relative simple issues; so where is the instantaneous justice going to come from?
It has to be quickly applied to make it meaningful.
It is clearly going to be unfair to larger contracting organisations than the smaller ones because of the scale of the larger commercial pressure on bigger firms. So will it not mean that the best (and perhaps largest) suppliers will have to bid with additional margins (as a safeguard) compared with Messrs. Bodge-it & Leg-it? Also it might mean that the government will end up with a series of poor and inadequate suppliers.
Phil King has his work cut out because there needs to be much better & clearer thinking applied before this rather simplistic penalty system is adopted. I would suggest that financial mechanisms are used initially before the sledge hammer is dropped.