Neither does it disappear when the client is a public sector body. In a report to the Treasury in 1998 a Bath University research unit concluded: "There appears to be little practical concern shown by public sector clients for the treatment of those contractors and suppliers without direct contracts. The … slow processing of payments that increase the vulnerability of suppliers and subcontractors highlight this lack of concern."
Unfortunately there has not been a dramatic improvement. The Better Regulation Task Force has just reported to the chancellor that poor payment practices are an obstacle to smaller firms seeking public sector contracts. The taskforce makes reference to a suggestion from parliament's trade and industry committee; this was that retentions should be phased out by 2007. It recommends that public sector clients ensure that payments flow down through the supply chain. They should also insert in their contracts with first-line contractors that interest is paid in accordance with the Late Payment of Commercial Debts (Interest) Act 1998.
But, in my view, something more revolutionary is required. Payment practices in the UK construction industry are outdated and inefficient. Essentially, they remain driven by two factors:
- The undercapitalisation of procuring organisations – particularly first-line contractors that sublet most of their work.
- The interest of certain elements within the quantity surveying firmament that still believe (through inertia or otherwise) that, contrary to the Latham Report, the measurement and valuation process should be retained.
Construction turnover is funded bottom-up. Most economists would blanch at the inefficiency of this
The constant headache for firms at the end of the payment queue is increasing their borrowing facilities when they do not have certainty over throughput of cash. The sad fact remains that construction turnover is funded bottom-up. Most economists would blanch at the inefficiency of this.
So, this is my seven-point agenda for radical change and public sector clients should take the lead:
- Where there are teamworking or partnering arrangements, these should be cemented by having a team bank account out of which all payments are made.
- Payment cycles should start when work begins, which is often well before work on site starts. Well over half of construction output is now planned, designed, assembled and manufactured off site.
- Where clients desire warranties from subcontractors they should undertake within those warranties to make payment directly to subcontractors in the event of non-payment by main contractors. Furthermore, where subcontractors are required to obtain materials from a specified supplier or where they are required to purchase equipment, machinery or plant specified by brand name, they should be paid for these items directly by the client.
- Where performance bonds are required, payment bonds should also be provided as a quid pro quo.
- Retentions should be phased out by 2007.
- Remove the ridiculous provision in the Construction Act that still allows for pay-when-paid in the event of insolvency upstream – those subcontractors at the end of the payment queue don't have this protection against their suppliers.
- Greater use of cost arrangements that are based on activity or milestones and targets.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group.