West Midlands Centre for Constructing Excellence (WMCCE) runs a monthly Question & Answer Feature with the Birmingham Post newspaper, where a panel of industry specialists give their opinions on the current topical issues in construction. This month the experts were Brian Kilgallon, Tony Hyde, Keith Blizzard and Jonathan de Souza. The topic was -
Late payment of invoices can destroy a business. What should be done to improve prompt payment in the industry?
Brian Kilgallon, Partner at Rider Levett Bucknall and currently a Fair Payment Advisor to the Office of Government Commerce.
A big part of the problem with late payment is that historically clients have little or no visibility over payment timescales to the supply chain on their projects below the main contractor. Even on open book arrangements where clients often have the right of audit, they rarely have the available resources to undertake them. Despite a number of recent initiatives by the Department of Business Innovation and Skills and OGC, progress has been slow influencing real change.
Since autumn 2009 OGC has been working on a set of contractual provisions that will be incorporated into future public sector projects. These include defined payment periods down the supply chain from a common valuation date. To monitor these new requirements, every public sector project will capture payment performance data at each payment cycle.
OGC is developing a web based system which all public sector clients will use to capture payment data in a consistent way. In designing this system the emphasis has been on making it simple to use by all parties, while at the same time providing a reliable source of payment information that can be shared across the public sector.
These proposals were discussed with a broad cross section of industry representatives at a seminar in January 2010 and it is hoped they will be launched in the near future.
Tony Hyde- Group Managing Director of Thomas Vale Group
As a local contractor whose main priority is keeping the Midlands pound in the Midlands, nothing could be more damaging to the local economy than late payments of invoices to both ourselves as a contractor and our local supply chain.
Paying late to the companies who have placed their trust in you and supplied labour has what we call ‘the domino effect’ and potentially kicks out general public spending within local areas and limits the potential of market growth, not just in construction but in the knock-on effects on other industries.
Your supply chain are critical to the own success of your business, as smaller companies they specifically rely on prompt payment to pay their own business levies and costs, pay their employees and support their business development in the markets they work. Not paying them ensures a lack of personal disposal income and what you see is a slow down in all activity.
The LEK Report bases a figure for return on investment that for every £1 spent in construction a further £2.84 is spent in the local economy; for construction alone in the region this amounts to billions of pounds worth of economic regeneration cross-sector.
Thomas Vale Construction commit to paying their subcontractors in 30 days or less and in most cases, many are being paid in just 19 days.
Prompt payment to your own business and supply chain ensures that you instill trust and honesty back in to a demanding and what has become, a somewhat confrontational economy over the past 18 months.
Keith Blizzard, Director of Shakespeare Putsman LLP
The provisions of the Housing Grants, Construction and Regeneration Act 1996 have greatly improved the position on payment for both main contractors and sub-contractors whilst they are working on site because they have clarity of what they are to be paid; how that has been calculated and when they are to be paid. If they are not paid on time, they have a statutory right to suspend the carrying out of the works, subject to a seven day notice period. However, the problem of delayed payment remains once the works on site have been completed and suspension is of little or no effect.
The HGCR Act has provided the adjudication process for speedy dispute resolution in which no legal costs are recoverable and the losing party normally has to pay the Adjudicator’s fees. This provides an incentive not to be the losing party in an adjudication. The Late Payment of Commercial Debts (Interest) Act 1998 has also provided high rates of interest which are applied by statute to late payments but even high rates of interest on late payments do not provide a sufficient threat to the non payer and do not adequately compensate the unpaid.
To improve payment after the works on site have been completed, the consequence of not paying must be made more painful than the benefit of not paying.
One idea would be to make the non-payer liable for the consequences of non-payment, particularly when it results in the unpaid becoming insolvent but this would require a substantial change in the law.
Jonathan de Souza, Director of Constructing Excellence
Talk to any sub-contractor or supplier in construction and they will, I am sure, confirm that timely payment is one of the greatest issues they face. There are myriad tales of businesses, particularly SMEs, in the sector going to the wall due to issues of cashflow rather than profitability. Constructing Excellence has long argued that integrated and collaborative working is the route to achieving best value (and has the evidence to prove it!) and recognises that fair commercial arrangements are an aspect of this.
So, what can be done? Government intervention, predominantly through the Office of Government Commerce has been admirable. Government clients have been increasing moving towards 10 day payment periods to their contractors. Unfortunately, tier one contractors have not necessarily been passing these payments on in the same way. As a result central Government will be looking to ensure that the benefits of prompt payment are increasingly passed down the supply chain in future.
In the current financial climate all parts of the industry should recognise that one major risk to the successful delivery of projects is sub-contractor and supplier insolvency, to which the withholding of payment is a contributing factor. At Constructing Excellence, our Economic Task Group is currently reviewing what positive steps clients, contractors as well as sub-contractors and suppliers themselves can take to mitigate this risk. What is certainly recognised is that timely payment has an important role to play.
The next Q & A Feature, will be published in the Business Property Supplement of the Birmingham Post newspaper on the 17th June 2010.
