The government says its suppliers will be paid within 10 days, but it still has an awful lot of work to do to stamp out payment abuse in the public sector

There is increasing evidence that payment abuse is on the increase. According to Pricewaterhouse Coopers, construction businesses are going into insolvency each day. Administrators’ reports have a familiar ring: “This business was suffering from severe cashflow problems resulting from late payment and bad debts.” A lot of hot air seems to be expended on whingeing about the problems, but what are we doing about it?

Public sector clients should be doing a lot more. They commission almost 40% of construction spend. The Guide to Fair Payment Practices – published by the Office of Government Commerce on behalf of the Public Sector Construction Clients’ Forum – came into force a year ago. There were two key recommendations:

  • All public sector clients to sign up to a Fair Payment Charter and only appoint those who are prepared to sign the charter (that is, all members of the delivery team should sign it)
  • Project bank accounts should be introduced on all public sector projects where practicable and cost-effective.

This should be happening now, especially since Lord Mandelson announced that suppliers will get paid in 10 days.

Defence Estates intends to use project bank accounts on all future standalone prime contracts. Its example should be followed across the whole of the public sector – this is the only way to ensure that the government’s 10-day policy is delivered.

Where project bank accounts are not in use, public sector clients should enter into tripartite agreements with lead contractors and supply chain members to make direct payments to the supply chain if payments are not being made within the requisite time or are not being made at all. I am aware of clients in the private sector that are already doing this. The tripartite agreement is essential, since it helps avoid the risk of clients having to make double payments if the lead contractor becomes insolvent.

It is time to heed the recommendation of the House of Commons business and enterprise committee that public sector clients end the practice of retentions and ensure this is implemented along the supply chain. This would put £1.5bn back into the industry. Some public sector clients, such as the Highways Agency, Defence Estates and several local authorities, have already done this. They are joined by the Olympic Delivery Authority.

Defence Estates intends to use project bank accounts on all future standalone prime contracts. Its example should be followed across the whole of the public sector

In its November 2008 pre-Budget report the government stated that it would “help SMEs get a fair deal when they are subcontractors”. We have not heard anything from the Treasury as to how it intends to take this forward. I suggest the Treasury looks at German law that requires public sector procurers to stipulate that successful tenderers will not impose less favourable conditions (especially as far as payment terms are concerned) on their subcontractors than the conditions agreed between the procuring authority and tenderers.

Public sector clients should insist that the suite of contractual documentation for the project should be used by the whole supply chain. Government policy is to promote collaborative contracts across the public sector. Perhaps this is a job for the proposed chief construction officer?

Returning to the issue of insolvencies, the business and enterprise department must act to abolish the pay-when-paid exemption in section 113 of the Construction Act. This enables the main contractor (in subcontracts) or a subcontractor (in sub-subcontracts) to cease making payment where his payer, the client (or main contractor), goes into insolvency. In the department’s 2005 consultation 67% of respondents agreed that this should go. It must go.

In the US there is the Miller Act which applies to federal construction projects and also “Little” Miller Acts which apply at state level. Before a federal contract exceeding $100,000 (£68,000) for construction works is awarded, the successful company must provide a payment bond to protect its subcontractors. The bond is equal to the total amount payable under the contract. If the subcontractor has not been paid in full within 90 days after the date on which the relevant work was carried out, they can make a claim on the bond in respect of the unpaid amount.

We should now give consideration to such measures in the UK. Some will moan about the increased cost of providing this kind of protection, but they ignore the huge cost incurred by firms in providing performance bonds, payment guarantees and retentions.

There is now the political will in government to address these issues and consider any option that will help firms weather the current storm. Desperate times call for desperate measures. But whatever is done, it must be done now.