Code red – pressure grows to change poor payment practices

Bad payers have been outed. Subbies always knew who they were but this week the government has chosen to name and shame them – or at least give a bunch of them a slap on the wrist. Out of 17 firms named in total, seven are contractors or housebuilders. So let’s list them: Balfour Beatty, Costain, Engie, Interserve, Laing O’Rourke and Persimmon have all been suspended from the Prompt Payment Code (PPC) for failing to pay 95% of supplier invoices within 60 days, while John Sisk has been removed from the code for non-compliance and not providing a plan for how it will meet the terms of the code.

Read: Balfour Beatty and Laing O’Rourke chucked off Prompt Payment Code

For the others, it’s a temporary suspension with an agreed action plan to reach the requirements within a year. And there could be more names to follow as this was just the first phase of investigation by the Chartered Institute of Credit Management, which oversees the PPC on behalf of the government. A second phase is looming. 

Does any of this matter? Should main contractors even care? On the face of it the consequences seem minimal. The code, which says signatories should work towards 30-day payment terms, was set up back in 2013. It is entirely voluntary and it has so far had little noticeable effect. The government says it expects key suppliers to be on the PPC list, but the Cabinet Office confirmed to us that the payment terms data that signatories supply has no bearing on public sector procurement decisions.

We should take this as a clear sign that the government is running out of patience with the main contractors’ failure to pay on time

One of the less convincing benefits of the code is the permission to use its logo on all contractor documentation to, as its website states “show you are serious about good payment practice”. So presumably these recently suspended firms don’t get to use that logo until they clean up their act – and presumably that won’t be keeping them awake at night. 

Nevertheless, this is a significant moment. Suppliers have been suspended from the code before but this is the first time the government has gone public with the names.

We should take this as a clear sign that it is running out of patience with the main contractors’ failure to pay on time – not one of the UK’s biggest 15 contractors has an average payment time below the 30 days the government expects of its suppliers on public sector jobs, according to data large companies are now forced to disclose.

Read: Big firms will need to speed up payments to meet government demands

This data shows the two biggest contractors, Balfour Beatty and Kier (which risks being caught up in the second phase of the PPC), have average payment periods of 50 days and 52 days respectively, while the biggest private contractor, Laing O’Rourke, revealed this week it is also on 52 days. True, this represents a slight improvement on the figures for the previous six months – but we’re only talking a matter of a day or so. In the case of Laing, it actually took a step backwards in terms of the proportion of payments that take under 60 days: in the first reporting period that was 59%, and in the latest period it’s slipped to 57%.

So if this is the lamentable progress made to date, what are the chances of bad payers turning things around enough to be reinstated as PPC signatories this year? Low, would be the educated guess, especially if the only sanction is permanent exclusion from a voluntary code. But there could be more at stake. Last month Cabinet Office minister Oliver Dowden wrote to key government suppliers threatening to ban them from future public sector work unless they hit that target of 95% of invoices paid within 60 days. Shape up or ship out, was the message.

What this means in practice is that from September if you are a government supplier putting in bids for public work worth more than £5m, you will have to submit your payment records. Just how the government intends to follow through on this threat is unclear, but some in the sector have already seen the tide turning. Back in March John Morgan, chief executive of Morgan Sindall, said: “I think your payment record is going to become part of winning a public sector contract […] It’s also market-driven – we need to pay well to attract the best supply chain.” Morgan’s own firm is better than most and can boast average payment terms of 44 days, but it still comes up short with only 78% of invoices paid within 60 days – though you get the feeling he’ll be working hard to reach the magic 95% government target.

Others – preoccupied with debt levels – will be more hamstrung by a need to keep cash in the business to demonstrate stability, which in the short term at least overrides any public image gains made by paying suppliers in a timely fashion.

Small business campaigners have been lobbying for decades for better payment terms and – bar the limited adoption of project bank accounts – they have had little success in advancing their cause. The PPC has been seen by some as a hindrance rather than a help – accused of being a distraction from their aim to bring in regulation that has some actual teeth. But this week’s events may provide some satisfaction: by calling out a handful of main contractors by name the government goes some way to vindicate some long-held grievances.

And of course, if Dowden is true to his word and come September poor payers are banned from public sector work, the pressure will really be on main contractors and the balance of priorities could start to tip in suppliers’ favour.

Chloë McCulloch, editor, Building