A Responsible Payment Culture – The Government Wants SME’s Input.

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Article written by Colin Hale

A most interesting Discussion Paper found its way into my email inbox the other day. Entitled “Building a Responsible Payment Culture”, it has been prepared by the Department for Business Innovation & Skills (BIS), with a forward written by Vince Cable (Secretary of State for Business, Innovation and Skills). I opened it with all my usual scepticism and settled down for a read through the same glib aspirational stuff that repeatedly gets hauled out in documents such as this. I was however pleasantly surprised by its meaningful content and felt moved enough to write this article.

The paper is essentially a consultation document and canvasses views on payment culture, both as it stands at the moment and what could be done to improve it. It is not limited to construction, but that said I feel that the construction industry bears the brunt of payment abuse and Specialist contractors could provide the most positive impact.

Specialist contractors, through bitter experience, know only too well how they are affected by the often irresponsible payment culture of main contractors and their propensity to bank with the ‘Bank of Sub-Contractor’ for longer than is either morally defensible  or contractually correct. How to address this imbalance is something that has been wrestled with in the construction industry for decades without real improvement and main contractors simply pay lip-service to any payment responsibility code or charter and continue  misusing the ‘purchasing power’ they enjoy,  in most of the normal commercial circumstances.

The Government appears to finally have recognised the severe, and entirely unnecessary, administrative and financial burden put on small to medium businesses every year simply because such businesses are not paid properly. It has determined that the impact of late payment stops businesses from investing to grow, creating new jobs, paying their suppliers properly and from contributing fully to economic prosperity. Not exactly a rocket-science conclusion but at least it is something on which to build.

The consultation that the document seeks to draw upon is what Government, businesses and other stakeholders can do (collectively and individually) to build an environment where larger businesses treat their suppliers fairly and accept their obligation to pay what they owe, when they owe it and, if possible, without over-burdensome and complex enforcement legislation

The paper seeks views on

  • whether more can be done to change business culture through measures to enhance accountability and transparency;

  • how to encourage small businesses to make better use of the statutory rights they already have and whether there is a case to enhance those rights; and

  • how the Government can help small businesses to help themselves to reduce the risk of late payment

The paper discusses the perceived current position, asks 24 salient questions and provides space for answers to each.  The questions are raised in the narrative body of the relevant section of the paper.

I am sure that most, if not all, of the questions will resonate with the Specialist contractor and each question raised will give rise to a host of anecdotal evidence of the experiences suffered. I see no reason why the answers provided by Specialists should not include references to such anecdotal evidence and no reason why the answers should not give rise to a “name and shame” approach.

It is only if the Government is made fully aware of such payment abuse, with specific examples where possible, that there will be the opportunity presented to stamp it out. Remember, one voice is but a whisper a series of voices can become a crescendo that becomes impossible to ignore. I was taught long ago by a very eminent lawyer that “less is more” but in this instance “more is definitely more”. The greater number of Specialist contractors that respond, the greater the opportunity of convincing the Government that there really is a serious payment problem out there.

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At the end of the paper it asks for any other comment that might aid the consultation process as a whole and asks, if the provided answers require an acknowledgment and provides a suitable tick box.

In respect to the final “have your say” part of the paper, my thoughts are that the Government should quite simply ask all of the main contractors that it has employed over the past two years (going back to the incoming New Construction Act in October 2011) to provide a copy of the payment terms that it typically contracted on with Specialist contractors on and further to confirm in what period the Specialist actually received payments. This would enable the Government to ascertain (on a transparent basis) the typical length of time that these main contractors held Specialist’s monies for. My experience is that payment terms of 60+ days from the end of the month in which the work was carried out are not uncommon. Two very simple questions could then be posed to each main contractor, along the lines of

  1. “If you are being paid by either by the Government or any private Employer at anywhere between 14 to 28 days from the end of the month, why do you need 60+ days from the end of the month to discharge payment to the Specialist?”

  2. “What do you do with the money that you have received in the period between the date that you get paid (14 to 28 days) and the date that you release payment (60+ days)?”

Having to answer two questions as straight and direct as these would make the main contractor most uncomfortable. The delay cannot reasonably be explained by “administrative procedures” and the responses should be published. It would make for an entertaining read, as the main contractor then employs its spin-doctors (aka legal advisors) to attempt to come up with a plausible excuse.

Government construction contracts are placed with a requirement to ensure that main contractor’s contracts with Specialist contractors either provide for Project Bank Accounts or include a contractual requirement to pay to Tier 3 of the supply chain within 30 days. I am firmly of the opinion that even on Government construction contracts this payment regime is, for whatever reason, not working (put simply, it is abused) and again I would urge the Specialist to name and shame.

I am aware that the Advisory Board of the Confederation of Construction Specialists (the CCS) will be submitting a combined response on behalf of its Members. If you are a Specialist contractor and not a member of the CCS then your response should be issued direct to the Government. Responses  will carry more weight if each Specialist contractor submits its own response.

As to the type of response that the Government should be provided with, the general opinion amongst those that I have canvassed is that new legislation should impose a statutory duty on main contractors under Government and / or Private contracts:

  • to issue sub-contract terms that filter down from the Main Form of Contract (which will often be a standard JCT or NEC version) with an equivalent JCT or NEC Sub-Contract;

  • to ban hybrid sub-contracts in their entirety. These are often so onerous and written simply to give the main contractor a further unfair advantage (not content with sitting on monies for inordinate amounts of time, it wants to impose as many unfair conditions as possible to stop the Specialist getting paid). Such unfair advantage was not the intention of the standard Contract forms;

  • to  pay Tier 2 Specialist contractors within 30 days (this can work providing Government / Private Employers pay main contractors within 14 to 28 days, which most do, of  the Valuation dates);

  • to introduce a requirement that the first payment to the Specialist is to be certified no later than 30 days from commencement of the Specialist’s commencement on site;

  • to ensure that ALL construction contracts over a certain size (for example, £100,000) are administered via a Project Bank Account (effectively ring-fencing the monies) and that this Project Bank Account used for the benefit of the Specialist contractor;

  • to ensure that the main contractor passes on to the Specialist the benefit of any Advance Payment that it receives, or alternatively to ensure that ALL contracts have provisions for an Advance Payment;

  • that interest for late-payment is punitive (say 15% plus over base) and certainly not less than the current rate of interest payable by the Late Payment of Commercial Debts (Interest) Act 1998. All too often the main contractor changes the contractual interest in respect of late payment to 2% or less above base (making it then a cheap method of borrowing).

To be effective the changes MUST be embodied in statute. Supply Chain Payment Charters and Codes, although well-meaning, will have no teeth and the main contractor will always simply pay, at most, lip-service to anything within them.

Specialists will not have to be reminded that under  typical payment terms, the  likely first payment “final date for payment” could at best be some 75 + days from the date the Specialist commences work on site. This is calculated by circa 30 days to first  Valuation + 45 days (if the Specialist is very fortunate) to the actual final date for payment.

There cannot be many businesses that are based on the financial model that applies to the Specialists contractors within the industry at present. Specialists provide labour, materials and plant plus Head Office overheads for close on two and a half months without receiving any payment whatsoever. Even then such payments, when due, are further subject to onerous Sub – Contract terms that include  potential risk of unsubstantiated  “set- off” and “withholding”  by  the main contractor (notwithstanding that the Construction Act requires set off or withholding to be substantiated) and with notification of such ‘withholding’  only required within a few days of the final date for payment date. I have experienced sub-contracts stating the Pay Less Notice can be given within 1 day of the final date for payment, and that 1 day is not even confirmed as a working day, so it could well be a Saturday or Sunday.

The payment process to Specialist contractors gives rise to a high risk financial situation, which is wide open to potential abuse (and the main contractors never fail to amaze with their abuse tactics) made worse by the adverse consequential contractual circumstances. Some of the relatively short term sub – contract periods on site can mean that the Specialist might have supplied and installed 100% of the Sub-Contract Works before the first final date for payment is due and therefore the Specialist will have no immediate and tangible ‘levers to pull’ in the event that the main contractor fails to make proper payment (the contractual ability to suspend the Sub-Contract Works having long gone as the Sub-Contract Works will have been completed).

These circumstances highlight the issues typically facing Specialist contractors if there are no statutory tools to immediately penalise main contractors who fail to comply with the agreed payment terms (albeit often onerous payment terms that it has already imposed upon the Specialist).

The statutory tools brought in must provide an effective and compelling deterrent in order to dissuade main contractors from delaying payments and to enable Specialist contractors to speedily and readily take the necessary formal steps to enforce payment that is properly due plus recovery of contractual interest.

The current right to adjudicate on a payment issue is not a sufficiently quick “short-term” mechanism for the Specialist. A 28 day period from referral to decision could well extend by a further 7 days from the Notice of Adjudication and a further 14 days from the referral; making a total of 49 days, meaning that the Specialist could possibly have carried out a further 49 days work  at risk without receiving proper payment.

The new trend for so called “‘Early Payment” schemes, which a number of main contractors are now seeking to introduce is positively abhorrent. The idea is for the main contractor to give an early payment (earlier from the 60 to 120+ day period that the main contractor is now making as “normal” payment terms) in exchange for a further financial discount.  The “brought forward” payment timing is of course not an early payment in relation to typical JCT or NEC Sub-Contract payment terms but is a payment earlier than might otherwise be forthcoming from main contractors arising out of its introduced 60 to 120+ day payment terms. Furthermore the inappropriately named “early payment” will eventually, if taken up by Specialists, be subject to an additional fee payable by the Specialist seeking such “early payment” thereby putting further downward pressure on the already competitive margin necessary to secure the works initially.

Specialist contractors need positive steps to be taken to regularise the present disproportionate payment risk that they have to bear.  Government has asked for our views so we would be failing ourselves not to take this opportunity to provide them forcefully and meaningfully. I sincerely hope Specialists make the very most of this unique opportunity. My appetite to lobby Government in respect of a responsible payment culture has certainly been whetted.

This article is intended to set the scene for the Specialist contractor to maximize the opportunity potential that the Government paper provides and is a perfect opportunity for Specialists to have an input.

I strongly urge that Specialist contractors obtain a copy of the paper, read it thoroughly and then individually submit responses to the questions posed.

Responses to the discussion paper are being received from 7 December 2013 to 31 January 2014.

Colin Hale is a construction dispute consultant, solely representing Specialist contractors in payment and contract disputes against main contractors.

For further information please contact Colin Hale by email on [email protected]

The paper “Building a Responsible Culture” can be downloaded from www.gov.uk\government\consultations/late-payment-of-finance-building-a-responsible-payment-culture or can be requested by email to [email protected]

 

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