Payment reform proposals: government must try harder

Over the past 30 years or so, there have been almost 40 payment initiatives relating to construction – legislation/regulations, government/select committee reports, charters and codes. Yet we continue to live with widespread payment abuse. Will the government’s proposals for legislation announced on 24 March make a difference?  

I will grade the key elements point by point:

Increased scrutiny of large company payment reporting under the Reporting on Payment Practices and Performance Regulations 2017

Boards and audit committees of large companies will have to answer for their companies’ poor payment performance. If within a given reporting period a “significant” proportion of payments are made late, boards/audit committees will have to publish on gov.uk the actions taken or proposed to improve payment performance. Additionally, the small business commissioner (SBC) will write to boards of large companies to seek assurances about their payment performance.

7/10: This is heading in the right direction. But who is verifying the accuracy of the reported data? To date there has been no criminal conviction for reporting false data. One major contractor that is now in administration often claimed it paid within 30 days, but the firm’s subcontracts told a different story, with more than double that period being the norm. 

The SBC will be given new powers to fine large companies that “persistently” pay late (using data supplied under the payment: reporting regs)

The “trigger point” could be companies reporting that 25% of their suppliers have been paid late.

7/10: Much will depend on whether the penalty is large enough to act as a disincentive to pay late. The government states that it will be based upon the unpaid statutory interest liability. This will have to be calculated in each case. A standard fine of 1% of turnover will be easier to administer. A fine should also debar firms from bidding for public sector work.

There will be a hard limit of 60-day payment terms, reducing to 45 days after five years. mark: 0/10. This proposal should be resisted. The net result for many SMEs will be 60 days across the board

SBC to adjudicate/arbitrate payment disputes

This is a considerable extension to the SBC’s powers, which will include powers to investigate payment abuse and compel disclosure of evidence.

0/10: The SBC’s remit does not extend to disputes arising under construction contracts governed by the Construction Act. But why can’t small businesses avail themselves of this service given that construction adjudication is likely to be too expensive?

Interest of 8% above Bank of England base rate will be mandated for all late payments:

9/10: Interest on late payment is rarely claimed by firms in construction. This should make a difference because firms will not have to request that interest be added to late payments. Moreover, it will displace contractual attempts to impose a low interest rate or some other inferior remedy.

There will be a hard limit of 60-day payment terms reducing to 45 days after five years

Under the Late Payment of Commercial Debts (Interest) Act 1998 longer payment terms can be agreed provided they are not “grossly unfair”. The meaning of this amorphous term has not been considered by the courts.

0/10: This proposal should be resisted. Codes and charters in the industry have included 30-day terms. The Construction Leadership Council was supposed to have achieved 30-day terms by January 2018. The 2023 Procurement Act stipulates 30-day terms. The net result for many SMEs will be 60 days across the board.

There will be a time limit of 30 days for disputing invoices.

0/10: The government acknowledges that this will not be appropriate for construction contracts governed by the Construction Act: alignment with the payment notice procedure in the Construction Act will be taken forward – whatever that may mean.

The Construction Act could be amended to make the deduction of retention monies unlawful

Some 87% of respondents to the government’s consultation last year favoured reform of this practice. A very slight majority were in favour of the option of depositing retentions in a separate ring-fenced account (as opposed to a complete ban) or having some form of guarantee such as insurance or a bond. The government favours a ban but intends to consult further on the issue.

5/10: This is difficult to mark as the government has not finally settled on the way forward. If the final decision is to ban retentions my mark would be 0/10. I am sceptical that any proposed legislation will adequately provide for avoidance possibilities. New Mexico has been the only jurisdiction to ban retentions; other jurisdictions have legislated to place retentions in trust in a segregated account or with a third-party stakeholder. 

The New Mexico legislation has failed abjectly because lawyers have found myriad ways around it. For example, payments are contractually scheduled so that there is a close-out payment on completion of the work. Any legislation banning retentions will be bedeviled by avoidance problems giving rise to countless disputes. If any ban fails the likelihood of revisiting the legislation could be remote. SELECT, representing electrical contractors in Scotland, recently announced that its preferred solution is for retentions to be placed in a ring-fenced deposit scheme.

The legislation should also place a limit on the period of time over which retentions can be withheld and the amount which can be deducted.

Matters that should also be included in any legislation

Several improvements should be made to the Construction Act. Space forbids a full list but they include: removing the process plant exemption; completely outlawing pay-when-paid clauses; streamlining the payment notice procedure; and making adjudication more accessible to small businesses.

Concluding thoughts

A grassroots movement across the industry will be needed to ensure that any legislation is effective to improve payment security. But at stake there remains a fundamental issue. Traditional procurement with its emphasis on lowest price and risk transfer breeds payment abuse. Judith Hackitt alluded to this in her 2018 report on building safety. We must embrace procurement strategies that prioritise direct engagement with the supply chain, where the bulk of value resides.

Rudi Klein is a barrister with Kleinlegal