Wembley has sent a frisson of fear through the construction industry - is it a portent of what will happen at the London 2012 Olympics? Well, it ain't necessarily so
The Wembley saga has highlighted the need to consider how we improve our payment processes on Olympic projects. With the world's attention now on the performance of the UK construction industry, the last thing we want is for such projects to be bedevilled by payment shenanigans and insolvencies. Unless we address this issue now there is a real danger that the Olympic construction programme could be marred by payment strife.
The government wants a "dispute-free" Olympics; its preference is for procurement strategies that engender genuine teamworking. In that case our adversarial payment processes must go, as they destroy the trust on which teamworking is based.
As we all know, the basic problem is that the cash has to pass through the hands of a number of players each of which has an incentive to maximise the possession and use of that cash. Possession tempts use. The problem has been exacerbated by an overall increase in the layers of subletting.
The Construction Act has outlawed pay-when-paid (unless a third party is insolvent) but pay-when-paid arrangements are, in reality, applied every day. They are implicit in standard contracts such as the JCT. This stipulates that the lead contractor is allowed to pay its subcontractors after the expiry of the payment period in the main contract. This legitimises the use of supply chains as bankers.
But in spite of having this advantage, the recalcitrant payer still has endless weapons in its armoury. It can simply challenge the amount applied for by the payee and sit back. The only way to unlock this stupidity is for the payee to initiate a costly adjudication whereupon the payer comes out of hibernation to give chapter and verse on why the amount claimed is not due.
In the meantime nothing has been paid even though some (if not all) of the claim is due.
There can only be one solution to ensure payment security: every Olympic project must have a project bank account
In 2004 the Treasury set up a fair payment group to make recommendations to the chief secretary on better payment practices. Consultants were engaged to seek out payment exemplars, and they are still searching. A survey of engineering contractors carried out last year by the Specialist Engineering Contractors Group revealed that almost 60% had experienced payment delays and abuse on most government projects.
There can only be one way to ensure payment security - every Olympic project must have a project bank account. Here are the key factors to consider:
- Consider the status of the account. It should be set up as a trust, but an escrow account may suffice provided that it is made immune from "smash and grab raids" by liquidators.
- Define the procedure for paying into the account - this should be resolved between the client and the delivery team.
- Define the procedure for paying out - who will have the authority to enable the funds to be released; all members of the team should be paid simultaneously out of the account.
- Consider a project bank account side-agreement for the team's contracts - the contractual procedures for authorising payment should not be unduly disturbed.
Project bank accounts are about "parking" the cash in a safe place. Depositing the cash in someone's pocket will always place it at risk.
This is the professional and civilised way for the industry to conduct its affairs in the 21st century. Moreover, project bank accounts will provide the catalyst for genuine teamworking on all Olympic projects. Payment problems will cease to be a distraction enabling the whole team to focus on the delivery of quality.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group