Rudi Klein on the controversy over Jarvis payment terms
A couple of years ago I happened to be at meeting of construction's strategic forum when Sir John Egan expressed alarm at continuing payment conflict in the industry. His view was that an overhaul of payment ethics and practices was part and parcel of the improvement agenda for the industry. Yet, in spite of the Construction Act and the Late Payment of Commercial Debts (Interest) Act, the payment wars in the industry continue unabated.

In the autumn, the Specialist Engineering Contractors Group invited its member associations to survey their firms on whether payment behaviour was improving or getting worse. This was in the context of a report being prepared by the group on the Construction Act for the construction minister. The response from firms within the engineering sector made for some very sombre reading. A catalogue of abuse emerged. Payment cycles were lengthening, pay-when-certified arrangements (designed to get around the Construction Act) were everywhere and retention abuse was flourishing. A great deal of concern was expressed over the use of pay-when-paid in the event of a party upstream going bust.

Events over the past few months have reinforced these concerns. The collapse of Ballast, Mellville Dundas, Sunley Turriff and, more recently, Lilley have caused intense suffering in the industry. Almost £15m worth of retentions was lost in the Ballast collapse. Reputable firms are put in jeopardy and jobs are lost.

As a result, the payment performance of other main contractors (vis-à-vis their supply chains) is now coming under increasing scrutiny. A while back, I wrote a legal column in Building about one of Jarvis' subcontracts that contained a 90-day payment period linked with a pay-when-paid provision. Even with that length of time a "period of grace" was added for discharge of payment. Such payment periods are excessive by any standards. It also increases the supply chain's exposure to insolvency risks.

But Jarvis is not on its own. There are many other companies out there operating contractual provisions that ensure that small and medium-sized companies bear the brunt of financing projects.

Where do we go from here? The public sector is the key to bringing about change. It now accounts for more than half of construction business. In a report last May to the Treasury, the Better Regulation Task Force recommended that public sector procurers take a more active interest in payment behaviour down the supply chain.

A while back I wrote a legal column in Building about one of Jarvis’ subcontracts that contained a 90-day payment period

As a matter of urgency, I now invite the Office of Government Commerce and the Office of the Deputy Prime Minister (responsible for local government procurement) to issue firm guidance to all public sector procurers along the following lines.

First, no front-line contractor, whether engaged directly by a public sector client or indirectly through a PFI arrangement, should be appointed unless:

  • It can demonstrate that it has a history of good payment practices

  • It can show that it has the resources to pay its supply chain (otherwise, it should provide a payment bond)

  • It can demonstrate that its supply chain has been paid as a condition of payment.

Public sector procurers should require that all subcontracts do the following:

  • Contain payment cycles of 30 days or less and allow money to be discharged on the due date without any "period of grace"

  • Payment cycles to commence from the start of any off-site works such as design, fabrication or assembly (more and more of a contract's value is expended well before site work begins)

  • Interest is paid to subcontractors in accordance with the Late Payment of Commercial Debts (Interest) Act – government procurers have already been advised to this effect by the Treasury.

Where the public sector
client has abandoned retentions, this should apply down the supply chain.

To the extent that cash retentions remain, they should be ringfenced for protection of the supply chain and must be fully repaid on completion of satisfactory work.

Over the longer term, all public sector procurers should adopt payment mechanisms (such as project bank accounts) to help payment move down the chain.