We dont want to give you that

You know the game Who Wants to be a Millionaire? Contestants answer questions and if they reply correctly they move up the cash ladder. If they don’t they could lose it all.

The government faces a similar situation in relation to the Housing Grants Construction and Regeneration Act 1996, aka The Construction Act. Sensing that construction still has big problems with payment delays and subcontractors going to the wall, it launched a review and may try and “fix” the Act to improve payment justice.

But it’s cautious. It won’t start tinkering unless the industry broadly agrees to let it. And does the industry agree? Boy, does it ever not! Leave it alone, say main contractors, who pay. Change it, say subcontractors, who ask for payment.

The government has received 350 responses to its consultation document and says it will give its answer this autumn. While the clock ticks, we thought it might help to take a peek at the arguments.

Roderick Pettigrew, head of commercial and legal department for the Heating and Ventilating Contractors’ Association warns: “Any change is going to alter their commercial advantage. They (main contractors) are in a nice comfortable position where they can take the controlling seat over payment and that’s the cause of the payment abuse.”

No, no, says the Construction Confederation, which represents main contractors. Most contracts run smoothly, and trying to legislate to deal with a minority is inappropriate and unfair.

Payment abuse

Baloney, says Rudi Klein, chief executive of the Specialist Engineering Contractors Group (SEC). His members thought it was a major problem in 2003 and the situation is no better today. The law, he says needs tightening up to stop endemic payment abuse. A recent survey of SEC members working on government contracts revealed that more than half of respondents experienced payment abuse or delays.

Even the Construction Clients’ Group (CCG), which represents some of the country’s largest clients, admits concern. And a report from the National Audit Office suggested project accounts might help.

Look, says John Bradley, director of legal affairs for the Construction Confederation (CC): withholding cash is a serious offence and there is absolutely no evidence that main contractors are doing it without good reason, such as excessive claims or poor work. It sours relationships and the penalties are severe. The industry has moved on from the bad old days and partnering and co-operation are here to stay.

Scoff, scoff, goes the SEC. Klein points out that credit periods become longer the further down the supply chain you go and declares that it’s actually small firms who fund many projects.

Change. That was what many thought the Construction Act brought. It spells out the payment process and states all contracts should have an adequate mechanism for determining payment. This should answer key issues such as when payment is due and how much. It even offers further options of adjudication and further redress in a supplementary document.

But the government felt something wasn’t working. Hence the review. And the consultation document goes further and asks if the Act would benefit from defining what an adequate mechanism should be. This would include what constitutes payment under a contract, the amount and when it should be assessed.

Both the CC and CCG largely believe the act is working well and there is no need to meddle with it. The CCG goes on to say that clients in particular are concerned that: “any sector specific legislation has the potential to prohibit commercial negotiations between parties and to act as a barrier to new participants.”

Bradley says there is no need to spell out an “adequate mechanism” as it is already covered by the act and would just lead to more disputes.

But the SEC argues that although the act states that contracts should have an adequate mechanism, a firm may still be left counting the cost if a payer offers a different amount to what a contractor applies for, and both sides cannot agree on what should be paid.

The Act demands that payers should notify the payee of the amount due and how it is calculated no later than five days before the due date. These notices, also known as section 110(2), are largely ignored as there is no sanction for not issuing one. A payer can also issue a witholding notice seven days before payment – a tactic regarded by some as stringing along a payee.

Contractor out of pocket

Problems for a contractor start to get worse from this point. He or she will only know a few days before pay day how much a payer is going to fork out. If the sum is less or payment delayed it’s the contractor who is left out of pocket.

They are in a nice comfortable position where they can take the controlling seat over payment and that’s the cause of the payment abuse

Roderick Pettigrew, head of commercial & legal, HVCA

Yes the contractor can seek redress from the adjudication process. And although this is an effective option, it’s also a costly one and the contractor will still not see a penny until the payment issue is resolved.

That’s why specialists want the Act reformed – to ensure payment certainty. Klein adds: “Businesses need to know where they stand by the date for payment. Problems will continue since there is nothing in that Act stating what constitutes a debt and when a debt arises.”

He says an adequate mechanism requirement would not help the situation and would lead to more disputes and confusion.

“Moreover, there will be more disputes on whether the contracts contain the adequate mechanism requirements provided in the Act. Firms will not necessarily have a lawyer always present when deciding whether a contract is act compliant.”

So, a way forward, anyone?

Chris Morley of the CCG says the act should be changed in extremely limited circumstances. “The consensus across the supply chain is that on the whole the Construction Act is working extremely well as it is. This strongly suggests that attaining improvement will not primarily derive from further regulatory change, and in many cases could result in more harm than good,” he says.

Morley insists there are other vehicles that will move the situation forward such as the Government’s Fair Payment Task Group, and clients helping improve the cash flow to contractors. For example, the Highways Agency is involved in a process that pays contractors every two weeks. But while opposing a change to law, he thinks contractors need to buck up: payments must be paid promptly and there must be a clear aim to work collaboratively or in partnerships, he adds.

The Confederation is stressing a different approach. Bradley says there is just a simplelack of understanding of the act and how it applies. This could be fixed by offering guidance on the act.

“Contractors are astute individuals and the majority are able to negotiate their own payment terms and negotiations,” he says.

He rejects claims that those lower down in the supply chain are in an unfavourable position. With construction booming, good specialists have loads of power.

Pettigrew disagrees. Ever seen a specialist walk up to a main contractor and say: “Yes we will do the job for you, but only if you accept our terms and conditions?”

Summing up

Leave the act alone, the Construction Confederation says. In a hard hitting response to the consultation it says the proposals would cause substantial damage: “We believe they would only increase customary payment periods. They would hinder industry regulations throughout the supply chain and have a damaging effect on cashflow.”

The SEC is unrepentant and demands the Act be overhauled to stop further abuse. This would clear up once and for all the uncertainties and end delays, which have actually increased since the Act came into force, they believe.

Klein’s six-point manifesto goes like this:

• The payee must have a statutory right to apply for payment at any time. This would allow a contractor to make an earlier application for payment in exceptional circumstances. For example if there was evidence that the payer is in severe financial difficulty and to stop contracts offering long payment periods.
• The payer must respond to this request within a specified period and state the amount to be paid.
• If the payer offers a different sum to that applied for, this must be fully explained.
• If the payee does not receive a response, the act would state a payment date.
• But if the payer responds and offers for example less than what was demanded, this lesser amount must be paid.
• Adjudication would decide whether the payer is justified in not paying the amount demanded by the payee.

So there we have it. Or do we? Should the government keep its hands off the Act, unpopular as it is among payees, or make a white-knuckle bid for something better?

Remember, as Tarrant always says: “You don’t have to play, you can always take the money and run.”