Regulations have come into effect to make large firms report on their payment practices. Can the duty to report bring about a culture change in construction?
As of 6 April 2017 certain large businesses (including those in the construction industry) are required to report on their payment practices, policies and performance.
These duties (known as the duty to report) are prescribed by two payment reporting regulations (the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017).
Qualifying firms will now have to publish a report on their payment practices on a government website on a bi-annual basis - or face the possibility of criminal charges.
- Why is this duty being imposed? The idea behind the legislation is to flush out those businesses exhibiting poor payment practices and exploiting smaller suppliers by failing to pay on time. Hampering cash flow in this way can be crippling to small businesses, stifling expansion and hindering innovation. Businesses that have a large proportion of outstanding unpaid invoices and/or a consistent pattern of disputing payments will be publicly held to account. It is hoped that the duty to report will encourage such organisations to improve their payment practices - action that should have a cascading, positive effect on suppliers down the contract chain.
- What does the duty entail? Qualifying businesses will have to report on a number of payment issues including the proportion of invoices paid within 30 days or less; between 31-60 days; and over 60 days. Details of late payment disputes also need to be provided. This information is designed to provide an insight into the businesses’ payment culture and must be approved by a company director/ designated member of the LLP before it is published.
- Who is affected? Only “large” firms are required to comply. “Large” businesses are companies (however incorporated including private, public and quoted companies) and LLPs, which meet two of the three following criteria:
- Over £36m annual turnover
- Over £18m balance sheet total
- Over 250 employees
The payment information will be publicly available as it is published on a website provided by the government.
Stringent measures are in place for failure to comply. The firm and its directors risk prosecution and/or a fine for failure to publish a report.
- Is there guidance available? To assist those subject to the new reporting duty, the Department for Business, Energy and Industrial Strategy published guidance in January 2017. The guidance acknowledges that “thousands of businesses experience severe administrative and financial burdens simply because they are not paid on time” and explains which businesses are subject to the duty to report and how and when to report.
- What will be the impact on the construction industry? The introduction of the duty to report marks a concerted effort to disrupt the status quo by legislative means. However, the construction industry will appreciate this will not be the first time that parliament has intervened to improve payment practices. The key aim of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) was to improve cash flow. The abolition of pay-when-paid clauses (aside from circumstances of upstream insolvency), brought about by the Construction Act was designed to promote fairness and increase payment clarity and certainty in construction contracts. Similarly, Regulation 113 of the Public Contracts Regulations 2015, requires every awarded public contract to contain a clause ensuring valid and undisputed invoices are to be paid within 30 days.
Despite undoubted improvements since the Construction Act was introduced, the construction industry is still renowned for late payment habits. All construction businesses record invoices in different ways with payment practices devolved to site or project level. Some firms may be forced to implement payment monitoring practices in order to comply with the duty to report. It is likely that many large construction companies will find implementation to be another layer of bureaucracy or administration.
However, the prospect of closer payment scrutiny for large contractors is likely to be welcome news to smaller subcontractors facing liquidity issues as a result of habitual late payment.
The duty to report may also have wider political implications. Chronic undersupply of affordable homes has been an issue for some time. It is almost certain that whatever government we have on 9 June, will want to promote a healthy construction supply chain that is able to meet any housebuilding programme. Prompt invoice payment and a reduction in cash-flow issues are likely to aid this process.
The risk of criminal proceedings and fines should encourage payment transparency and compliance and, in time, an industry-wide change of attitude. Ultimately, the construction industry will have to wait and see if the duty to report has the desired effect.
Gurbinder Grewal is a partner and Frances Gordon-Weeks an associate in the construction team at Dentons