Are contractors with poor payment records about to be let off the hook?

Any hope main contractors may have held in their hearts that Boris Johnson’s new government would drop the fair payment agenda pushed relentlessly under Theresa May’s premiership effectively ended on 24 July. That was the day the new prime minister appointed Oliver Dowden to the role of paymaster general. 

Dowden had pushed through a plan to block poor payers from new government work as a junior minister in the Cabinet Office, and with his promotion to a more senior role in the same department, the chance of a change of tack ended. 

While governments of various stripes have been attempting to improve the payment culture in construction for the best part of 20 years, Dowden’s gambit, prompted by the uproar following the Carillion collapse, is much more ambitious. And for main contractors unwilling to clean up their act, it threatens to hit them where it hurts – in their wallets.

“If they don’t get paid on time, it can have a significant impact upon their survival”

Martin Traynor, crown representative for small business, Cabinet Office

From 1 September, government departments and agencies will be required to assess bidders for new work against their past performance on paying suppliers. Those who fail to pay their suppliers within 60 days can be excluded from bidding for government work. 

Rudi Klein, chief executive of SEC Group, which represents specialist construction subcontractors, says: “We very much welcome this. It’s potentially very powerful.”

The latest published data, set against the detailed Cabinet Office criteria, suggests a number of the biggest construction names in the UK may face whole or partial bans from new public work, including Laing O’Rourke, Kier, Interserve and Galliford Try. However, a recent report from government spending analyst Tussell concluded enforcing the policy wholesale would be “counterproductive” given how few are meeting payment targets. With contractors in a fragile state, is the government really about to go through with it?

• Payment times: How long do the top 50 contractors take to pay up?

Stark reality

The answer, somewhat predictably, is both yes and no. Yes, in that Dowden’s Cabinet Office here publicly recommits the plan; no, in that the little-understood details of how the plan will operate contain significant loopholes that are likely to be big enough for most major contractors to sail right through.

Martin Traynor, the Cabinet Office’s crown representative for small business, says the government is “very much recommitted” to the policy following the reshuffle. It will, he says, inevitably mean some firms being excluded from bidding for major government contracts. 

“This is about using the might of government purchasing to change the behaviour of government’s suppliers, and there is a determination to deliver on that,” he says.

“The stark reality is that there will be some firms that drop out [of supplying government]. Those with poorer track records will be precluded.”

Certainly, if the published data on payment performance is anything to go by, the current performance of the sector is a long way from where the government says it needs to be. Traynor says the industry has been guilty of “very poor practice” in the past 20 years. 

“This is critical for small businesses, because if they don’t get paid on time, it can have a significant impact upon their survival,” he says. 

“The government has been trying various options [to improve payment], which clearly didn’t work.” 

An analysis of the sector’s biggest 25 contractors by turnover by Building underlines this. It shows that only one – Willmott Dixon – meets the target, technically defined as paying 95% of invoices within 60 days, across its whole group. While a further seven of the top-25 firms contain one or more individual subsidiaries that meet the target, the vast majority of the 89 operating entities within the top 25 are below standard. 

Tussell’s recent analysis found that, of 70 major government construction or outsourcing contracts let since 2015, just four went to payment-compliant firms. If the government’s standard were rigorously applied, the study found, four-fifths of all government suppliers would be frozen out.

This year a rash of major construction names have been excluded from the government-industry Prompt Payment Code (PPC) – a voluntary system designed to meet the same target – for failure to perform. Contractor John Sisk & Son was removed from the PPC in April, while others including Balfour Beatty, which says its action plan to achieve compliance has been accepted by the PPC, Interserve, Laing O’Rourke, Galliford Try and Severfield are currently suspended. While the PPC is run independently of the Cabinet Office plan to bar poor payers from government work, the PPC suspensions give some indication of which firms have the biggest issues to address.

Howard Seymour, analyst at investment bank Numis, who has looked closely at this issue, maintains firms “are now taking this really seriously – the pressure is on and they are responding”. Meanwhile, for those firms that pass the test, the possibility of exclusion of competitors could be a real benefit. Graham Dundas, chief financial officer at Willmott Dixon, says its track record on payment is now “100%” a competitive advantage. 

“Payment is now widely talked about and people are taking it seriously. Increasingly, it’s our customers asking us questions about it,” he says.

Wiggle room

But hang on. Public sector work was worth at least £60bn last year to the industry – approximately two out of every five pounds spent on construction. If the government is committed to a policy which, by its own measure, excludes at least four-fifths of the industry from working for it, why aren’t the major contractors in panic mode, lobbying furiously to get government to change its mind? The answer is that the small print of the policy contains an important caveat. While the official target is to pay 95% of invoices in 60 days, the government has made clear in an online Q&A detailing how it will be implemented, that it won’t actually bar firms as long as they pay at least 75% of invoices within 60 days and have a plan to improve. Contractors will also be given an opportunity to show how they are improving before any action is taken. Furthermore, Traynor says only “undisputed” invoices will be taken into account in calculating the figure – another major concession. 

These get-outs – described as temporary in the Q&A – make all the difference to the industry, changing the policy from being one where the vast majority would be excluded to one where only a tiny minority is at risk. Numis’ Seymour says many contractors initially baulked at the 95% target, which was thought to include invoices in dispute with suppliers.

“If the government had gone through with 95% [of bills paid within 60 days], including those bills in dispute, some were saying it just couldn’t be tolerated as a policy, it wasn’t workable,” says Seymour. “They [were saying they] would just give up [on seeking to meet the target] and take the pain – it was heading to a Mexican stand-off.”

In contrast, he says 75% is “workable” and “sensible”. “There are so few big contractors, it is actually very unrealistic to think the government could get the work done it needs if they had all been banned,” he says.

Traynor at the Cabinet Office admits the decision to not enforce above 75% was a reflection of what is practically achievable, but warns contractors they will still need a clear plan showing how they will improve. “The 75% figure is about reality,” he says. “Inevitably moving from paying in 90 days to paying in 60 days requires a significant cash injection and can’t be done overnight. So we’ve given some flexibility in the system.”

But he insists this flexibility is strictly time-limited. “Realistically we’re looking at a 12-month period [in which the 75% threshold applies]. It’s a temporary measure for those willing to work with us to improve. In a year’s time suppliers will have to meet the full target.”

For some, however, this “temporary” flexibility risks undermining the whole effort. Willmott Dixon’s Dundas says it and other exemptions will render the policy “totally ineffective”. 

“The guidance makes clear it allows for underperformance – it’s not a black and white pass-fail.” Until it is, he adds: “I don’t expect to see many peers not making the cut.”

SEC Group’s Klein describes it as “very disappointing.” “This might mean over the space of a year you just get one or two contractors below par – and they could get away with a warning.” He says the 75% threshold will have to be increased rapidly, as promised by Traynor. “Twelve months is the maximum [at 75%]. If any longer, contractors will start to feel comfortable that it isn’t being enforced in the way anticipated and will just relax.”

Make an example

However, despite these concerns, the data does suggest some major names do have reasons to be fearful. According to published data, two top-25 firms don’t meet even the 75% payment target – Laing O’Rourke and John Graham – while a further four have at least one business entity also not making the cut: Costain, Galliford Try, Interserve, and Kier. Of these only Kier, which has stated it had got average payment times down to 42 days, explicitly said, when asked by Building, that it was confident it would not be excluded from public work.

While the data does suggest the industry is making strides to improve payment performance – average payment times of the top 50 housebuilders and contractors improved by more than two days in the past six months – some expect the government will have to take action to prove it means business. Numis’ Seymour says: “I wouldn’t be surprised if government does make an example of someone.” 

For Klein, this is simply essential. “They have to act on it,” he says. “If they don’t debar at least one or two, then this will just fall alongside the 25 or so other initiatives in the past decade that have failed to change the culture.”