It is now more than seven months since the collapse of Carillion exposed the vulnerability of the supply chain in private and public sector construction projects. The events revealed not just how dependent small and medium sized enterprises (SMEs) are as suppliers to major Tier 1 contractors, but also just how important the trickle-down effect of work generated through public sector contracts is for small businesses and their financial stability.
Not only were many SMEs largely dependent on those contracts, they were also made to wait for payment, some up to as long as 120 days, a shocking and wholly unacceptable delay. This was despite the Construction Supply Chain Payment Charter (CSCPC) targeting a maximum of 30 days for payment. It was a wake-up call for the industry, the public sector and policymakers, who are rightly concerned about the welfare of SMEs, which form the backbone of the British economy and enable the construction industry to deliver.
It is now a legal requirement for all large companies to report on their payment terms for suppliers every six months, with the data published on the government’s payment practice portal.
As part of its campaign on fair payment, Build UK recently published payment performance data for 24 of its 27 members, made up of some of the largest Tier 1 contractors in the country. Disappointingly, it revealed that none of these leading contractors had achieved an average payment time of 30 days, the target set out in the CSCPC and backed by government.
Although there has been positive progress on fair payment practices within the construction industry in recent months, and the problem is at least now widely recognised, there clearly remains much more to do. Local authorities have a role to play in contributing to a drive for lasting change.
Councils as fair payment champions
Sub-contractors on local authority projects are, in most cases, local SMEs and make a vital contribution to the local economy. By ensuring that their suppliers get a fair deal through the contracts they commission, local authorities are better equipped to achieve their ultimate social and economic objectives for their communities.
Local authorities are also uniquely placed to influence outcomes for the supply chain through their purchasing power. As fair payment champions, they can drive change across the supply chain through their construction projects.
Many authorities are already doing this in a substantive way, not just by setting payment terms, but also through active involvement in the ongoing management of the supply chain during a project. For example, local authority clients can ensure that a Tier 1 contractor supports suppliers with prompt and regular payment, even whilst payment negotiations between the client and main contractor take place.
Local authorities should also strive to do better than payment within 30 days. As set out in our recent Essential Infrastructure report, Scape is calling for a commitment from commissioning clients to ensure payments to Tier 1 contractors within 14 days, for contractors to pay Tier 2 suppliers within 19 days and Tier 3 suppliers within 23 days, improving upon the current requirements of the CSCPC.
We know that this is possible, because we performance manage our framework delivery partners to meet these ambitious targets across the £4.5bn of live commissions for our public sector clients across the UK. Currently 90% of payments to Tier 2 suppliers on Scape frameworks are made within 19 days, and where not achieved we work closely with our framework partners on improvement plans. These include improvements to contractors’ systems and processes, which can in turn benefit the entire supply chain if adopted.
Innovation through procurement
As well as setting ambitious payment terms, local authorities are also driving change through innovative procurement methods that support SMEs.
E-invoicing is a way to speed up payment, and has been successfully adopted by a number of local authorities. If this digital approach were to become a more accepted practice as part of councils’ transformation plans, it would help to deliver efficiencies for both client and supplier. As suggested by the European Commission, the adoption of e-invoicing by the public sector could also act as a catalyst for the wider economy, by encouraging the use of digital practices within the supply chain.
Project bank accounts are yet another way in which councils could support their supply chain. By putting funds into a single account from which subcontractors can draw down, clients can ensure all parts of the supply chain receive their payment much more quickly. Project bank accounts do require a change in administrative procedure for clients, and although used by organisations such as Crossrail and Highways England, there remain some practical barriers to their use. However they are a good example of where public sector organisations are seeking to drive fair payment best practice.
As well as introducing new methods, the public sector and the industry must work together to end unfair practices. Cash retentions are an outdated yet lingering practice on many construction projects, and should no longer need to be adopted; procuring contracts in a better way that assures quality removes the need for withholding payment.
There is an ongoing public consultation on retentions, which is certainly a positive step in the right direction, but retentions impact the livelihoods of people all over the UK, so the decision must be made with haste.
Now is the time for action
Paying people fairly and in good time is critical to the survival of small businesses and to the long term future of our economy. As the industry and the public sector reflects on the lessons to be learned from the collapse of Carillion, we must acknowledge the role that all parties to contracts have in creating efficiencies and ensuring better outcomes for SMEs.
What has become clear is that the public sector, and in particular local authorities, should not rely entirely on the private sector to ensure better management and support for supply chains. By endeavouring to become fair payment champions, local authorities can empower local suppliers and drive substantive change.
With Brexit on the horizon, we can expect a sustained period of economic uncertainty to continue. Now more than ever, local authorities must provide stability and certainty for their supply chains through fair payment practices.
Victoria Brambini is managing director at Scape Procure