A light at the end of the tunnel

“I am committed to eliminating unfair payment practices and ensuring that we do right by our SMEs.” So said small business minister Andrew Griffiths at a Federation of Small Businesses gathering this week, where minds were no doubt focused on how the aggressive payment tactics, combined with mind-boggling incompetence, of failed giant Carillion threaten to ruin untold numbers of perfectly well-run businesses.

But how much has the government actually done since Carillion’s implosion to address unfair payment practices that are known to be rife on the ground? Evidently, its “Carillion taskforce”, which has met regularly in the wake of the collapse, has discussed payment practices and retentions at some considerable length. Yet in the almost six months since the liquidation we’ve had more talk than action.

The Cabinet Office launched a consultation on proposals to block companies with poor payment records from winning contracts, which closed in early June but has yet to publish the responses. So until we see the details and have a clear idea of the timeframe, it’s hard to judge if this proposal to punish companies that “cannot demonstrate a fair, effective and responsible approach to payment” will adequately tackle such a persistent and deep-rooted problem (we know from the latest publicly available statistics that big-name contractors’ average payment periods greatly exceed the recommended 30 days).

Network Rail’s intention to ban retentions and insist on 28-day payment periods is the kind of decisive plan that can be a game-changer, a catalyst that gets other clients following suit

The chancellor has also made the right noises, saying in his Spring Statement that the business department would undertake a call for evidence on unfair payment, in particular looking at the effectiveness of the Prompt Payment Code – which critics point out boasted Carillion as one of its signatories despite its 120-day standard payment terms. That call for evidence has yet to happen, possibly knocked off course by the endless Brexit shenanigans, but the hope must be it gets under way before parliament breaks for the summer recess.

Keen to show the industry is proactively trying to put its own house in order, trade body Build UK has said that it plans to benchmark its members’ payment records and it will set up a taskforce to expose blatant clauses in contracts designed to dump risk. But how much more effective will this approach be than, say, the statutory duty to report that came into force a year ago? It’s another attempt to influence companies to do the right thing, but it doesn’t compel them to do so.

That’s not all, though: Build UK did also join forces with the Civil Engineering Contractors Association and the Construction Products Association to call for the abolition of retentions altogether by 2025. Such a move would certainly go further than MP Peter Aldous’ retentions deposit bill, which has the more limited ambition of protecting retention money from insolvency higher up the supply chain. The bill has cross-party support in the Commons, but progress on that front has been delayed at least until the autumn, with no guarantee that it will be given the parliamentary time needed to get on the statute book.

Clearly Carillion has sparked much soul-searching within government, which acts as a regulator but also a very influential client, and within the industry itself. The point is that Carillion went bust in January, it’s now mid-summer and proposals to reform are going nowhere fast. Until last week that is, when Network Rail announced that it intends to ban retentions and insist on 28-day payment periods. This is the kind of decisive plan that can be a game-changer, a catalyst that gets other clients following suit.

The clincher, as Network Rail’s commercial director argues, is that this not only sets a precedent for clients, it also sets up new expectations of main contractors. Stephen Blakey is right to point out that “those contractors who agree to support Network Rail’s terms and conditions will face questions such as ‘Why wouldn’t they do it in Highways England’s portfolio? Why wouldn’t they do it in HS2’s portfolio?’”.

You could argue that contractors have made a rod for their own backs, and if there is a sudden collective clampdown from clients, that could squeeze the life out of those operating on very slim margins. Clearly such a situation would benefit no one in the supply chain. But if payment reform were to be done gradually and in consultation with companies so that they can adjust their business models to be less dependent on cash flow, there is no reason such a revolution would kill off businesses. On the contrary, a fair payment culture should bring new efficiencies at a crucial and potentially volatile time for the industry.

It’s hard to ignore the frustrating lack of progress in the Brexit talks at the moment: aware of the ticking clock, companies are planning for a “no-deal” outcome and the possibility of having to trade under World Trade Organisation rules. The latest Markit/CIPS data offered some comfort, showing strong activity in June, but this is only in contrast to a very weak start to the year. Overturning decades of payment abuse would be one way to boost the industry’s resilience – just one more good reason for clients and contractors to follow Network Rail’s lead and act now.