The devil is still in the detail

Yet another charter promising enforcement of payment terms is unlikely to make much difference now, says Chris Scott

Recent reports in the press suggest that the Construction Leadership Council (CLC), the government’s body for industrial strategy for construction, has agreed a charter, in addition to the Fair Payment Charter 2007, for payment terms with major players in construction, including Barratt Developments, British Land, Kier, Laing O’Rourke, Skanska.

The BIS press release says the charter sets out eleven “fair payment commitments”, including a commitment to phase in reduced payment terms, beginning with 60 days with immediate effect, 45 days from June 2015 and 30 days from January 2018.

Other commitments made in the charter include not withholding cash retentions, not delaying or withholding payment, and making payments electronically.

Those signing up to the charter agree to apply the fair payment commitments in arrangements with their supply chain and will be monitored for compliance against a set of agreed key performance indicators. Philip King, chief executive of the Institute of Credit Management, will now lead work on the development of monitoring arrangements for the commitments made by signatories to the charter.

So will this be the breakthrough that brings order to payment of the supply chain? I would say yes, but only if there had been an agreement now to pay within 30 days, and for all the monitoring that involves. Instead, the signatories have only agreed to this four years into the future.

The press release includes quotes from representatives from Laing O’Rourke and Skanska saying that: “No one section of industry and no one representative on the council can, in isolation, achieve the transformation we’re after: it will require everyone working together, across industry and government, including clients, contractors and the supply chain.”

There, surely, lies the key.

Will the payers buy in? It is clear the supply chain want it, as we see in the National Specialist Contractors Council’s (NSCC’s) Fair Payment Campaign, but what about the payers? Will most ignore it or circumvent it?

Codes or charters such as the one suggested are usually brought into being to avoid regulation. How will this differ from the Prompt Payment Code, which seems in general terms to have the same objective, and according to ICM, covers 60% of supply chain value in the UK anyway? Why will this charter work when legislation in the form of the Construction Act 1996 - supposedly improved in relation to payment terms in the Local Democracy, Economic Development and Construction Act (LDEDCA) 2009, or the Late Payments of Commercial Debts Interest Act 1998 - has not provided a solution?

All these ventures were borne out of consultation and high-brow deliberation, but they only tweaked the payment regime and allowed many to invent ways to circumvent the rules. We need to remember that the Construction Act was heralded as the legislation to assist supply chain payment. The Latham Report provided the context for the act which had two desired outcomes: to ensure prompt cash flow and allow swift resolution of disputes by way of adjudication.

While everyone agrees that adjudication has been a successful means of dispute resolution, I doubt if the same can be said concerning the payment provisions. Given the way the act and regulations were worded, the provisions as to payment were toothless or could be ignored, as the parties are free to stipulate the amounts of payments and their intervals. The regulations could also only be enforced by adjudication if the whole contract was in writing (RJT Consulting Engineers Ltd v DM Engineering (NI) Ltd). Well, surprise surprise, most contracts were not wholly in writing, so the rules could not be used in adjudication. Most contractors with written terms chose to use the lax nature of the provisions and put in alternatives to the timing of payments provided for.

It is also not so long since 120 day payment terms were suggested as likely to be the norm. Why would they not be? On the turnover of some of the businesses mentioned, millions of pounds are lost by cutting creditor days.

The EU directive and prompt payment code also provide that business to business payments should not exceed a fixed contractual payment period of 60 days. However, the directive then goes on to say that, unless it is expressly agreed and provided, such terms are not deemed to be grossly unfair. We have seen what that leads to - agreements will use the legislation to provide for payment of 60 days and more. When exactly will the payment days be “grossly unfair”?. The code as it is sounds a bit like providing for extortionate credit bargains to be unenforceable under the Consumer Credit Act but then ruling that such “bargains” (which might involve charging 1,000% or 2,000% interest) are not extortionate. Given such a comparison, 120 days is hardly ‘grossly’ unfair, is it?

Co-operation is to be commended, agreeing short payment terms to assist supply chain cashflow is to be applauded, and having KPIs and monitoring and penalising breaches is essential, but will everyone co-operate? I think not.

Will a code or charter be enough? Yes for some, but not for all. Better legislation is needed, but those advising on and devising the charter, like the legislation, are payers, so why not wait a little longer and be a little more relaxed?

Chris Scott is head of engineering and construction at Taylors

Your News

If you've got a story that would be of interest to Builder & Engineer readers, send us an email

Features

2017-05-31 13:33

The rate of Insurance Premium Tax (IPT) will rise by two per cent on June 1 to 12 per cent on all non-exempt transactions. Martin Bennison, managing director at construction finance firm Ultimate Finance, explains what this means for UK construction companies.

2017-05-25 08:41

Building Information Modelling (BIM) is growing in popularity and is now mandatory for centrally funded public-sector projects. Experts and the curious are gathering more and more frequently at dedicated congresses, exhibitions and workshops. Many people are now asking: Where does the UK stand on the issue of BIM and the digitisation of the construction industry?

2017-05-10 10:47

Opening site doors to more females is vital to plugging the construction skills gap, reports Claire Cameron

THE construction industry continues to be plagued by a well-documented skills gap with some suggesting the shortage could get worse before it gets better.

2017-05-08 14:27

If you work on a building site, are self-employed or have a zero-hours contract, you might be surprised to know you work in the ”gig economy”. This is the economy characterised by temporary work and irregular hours, pay and working conditions.

2017-03-29 10:31

Jeremy Gould, VP sales Europe, TomTom Telematics, discusses how technological developments in vehicle telematics have opened up new workflow management possibilities for the construction industry

2017-03-21 09:31

With the demand of oil increasing, it’s estimated that the Earth will reach its full capacity for oil consumption at some point within the next 20 years. This is despite the production of oil decreasing, and the construction industry is no exception to this, reports Niftylift.

2017-03-17 10:55

With construction firms leading the way in drone technology, Claire Cameron takes a closer look at how unmanned aerial vehicles (UAVs) can be used onsite

2017-03-07 16:20

While the physical safety of workers is prioritised on construction sites, mental health is often overlooked, reports Claire Cameron

Free E-newsletter Sign-Up

Sign up for our free e-newsletter

Looking for a company or service?