Rudi Klein addresses an open letter to the business secretary and the Cabinet Office, lobbying hard for certainty of workflow and cashflow to keep SMEs afloat
Dear Messrs Alok Sharma MP and Michael Gove MP,
I write to you in your respective capacities as having responsibility for construction policy and public sector procurement. I head an organisation which represents the largest value sector in UK construction. It comprises over 60,000 engineering firms, the overwhelming majority of which are SMEs. Thousands of these firms lost large sums of money in the Carillion collapse.
Construction industry resilience
A couple of years ago Constructing Excellence (part of the Building Research Establishment) published a report titled, “The Organisational Resilience of the UK Construction Industry: Are we built on a House of Cards?”. The report revealed that the industry was more vulnerable financially than most other sectors: it accounts for a disproportionate number of insolvencies relative to its contribution to the economy.
Construction is the bedrock of the economy
Nonetheless, the government considers construction to be the bedrock of the economy. In fact, the CBI estimates that for every £1 spend on construction the economy benefits to the tune of £2,92. This, I assume, was the reason for your insistence that, during the lockdown, construction should be open for business.
Prices are being driven down, whilst firms are incurring the extra costs that will be associated with maintaining all the new safety measures
The way forward out of this crisis
I am sure that you will appreciate that the majority of SMEs, which provide almost all the added value to the sector, are bereft of the resources necessary to weather the current crisis. Payments have either not been discharged or are taking longer to process. Overheads continue to pile up especially costs relating to demobilisation, remobilisation and trying to keep companies open for business. As firms try to seek new contracts they are finding that prices are being driven down, whilst incurring the extra costs that will be associated with maintaining all the new safety measures in place. Many SMEs fear becoming bogged down in disputes.
I am aware that you have been issuing some very helpful guidance urging the industry to act “fairly” and “responsibly”. This would be better directed to client organisations which set the commercial ‘tone’ for their projects: they could be challenged if they ignored the guidance.
The majority of firms are now clamouring for two things: greater certainty of workflow and greater certainty of cashflow. Below I set out an eight-point plan for helping SMEs overcome the crisis.
Greater certainty of workflow
- The first is for you Mr Gove. Radical reform in public sector construction procurement is long overdue. By implementing the Cabinet Office supported option of insurance-backed alliancing you will have greater cost certainty and the resulting efficiencies will enable more projects to be undertaken.
- Working with the Local Government Association and the Local Enterprise Partnerships the government should now instigate assured national and regional pipelines of work to be undertaken by SMEs. The £30bn construction works framework launched last year by the Crown Commercial Service can be used for this purpose.
- The government should now reduce (even for a period of time) VAT on repair and maintenance works to stimulate demand (and whilst referring to VAT, there should be a delay in implementing the VAT reverse charge until October 2021 to give firms some financial breathing space).
- To reduce the carbon footprint of existing building stock, the government should initiate a retrofit programme for the public sector estate: incentives (such as modification of council tax) could be given to private sector owners of commercial/ industrial facilities to do the same.
Greater certainty of cashflow
- The government should now adopt the Small Business Commissioner and Late Payments Bill introduced in the House of Lords by Lord Mendelsohn (this mandates 30 day payment periods in business to business contracts and the use of project bank accounts in public sector works over £500k, as well as outlawing certain payment practices).
- To date Mr Sharma your department has still to take any action to protect cash retentions; you can now adopt the lapsed Construction (Retentions Deposit Schemes) Bill introduced in the House of Commons by Peter Aldous MP in January 2018. SMEs are still losing up to £1m worth of retentions per working day, as a result of upstream insolvencies (based upon figures produced in the Pye Tait report, commissioned by BEIS, October 2017).
- The government should contact the major repeat private sector clients of construction, e.g. supermarkets, to establish their plans for promoting cashflow security in their supply chain.
- This crisis is ‘tailor-made’ for invoking the Civil Contingencies Act 2004. Regulations could be issued under this Act to suspend indefinitely claims and counter-claims directly due to the lockdown.
There will be those claiming that little needs to be done: the crisis, of itself, will help transform construction for the better by suddenly making the industry more collaborative, based on a few examples of good practice. For the majority of firms now desperately struggling to keep afloat, such advice would be regarded as ‘pie in the sky’. I invite you to give my recommendations some favourable consideration.
Rudi Klein, CEO of Specialist Engineering Contractors’ (SEC) Group