It’s the tender process, stupid

It is hard to disagree with the key features of the Fair Payment Charter. But a charter is always, at best, a mere statement of good intentions; what remains to be determined are the ways those good intentions will be put to the test.

First and foremost, fair payment provisions will only work if they find their way into building contracts, and it must be assumed that this is the Office of Government Commerce’s intention. The main change to contractual provisions will be the introduction of payment via a project bank account, and the publishers of both PPC2000 and NEC3 have confirmed that they will shortly be including optional provisions to this effect.

The savings promised by project bank accounts cannot be taken for granted. For example, some main contractors may factor into their current prices at least a week or two of interest earned from sitting on subcontractor payments and may quote higher prices if they are deprived of this.

For the value of project bank accounts to be proven, public sector clients need to do a number of things:

• Choose a standard form contract with the option of a project bank account
• In their invitation to tender they should request that the contractor and its subcontractors submit prices with and without a project bank account
• Use a procurement system under which they can properly analyse tender results when determining whether a project bank account will save money.

Securing client benefits under the fair payment regime will be very difficult indeed where it is operated within the rules of single-stage tendering.

There are many factors that influence the marketplace when bidding for a project and there are strict rules under the Public Contracts Regulations that prohibit renegotiation once bids are received. Hence, the introduction of project bank accounts and other fair payment practices, even if carefully explained in the main contract tender document, may simply not be communicated by the main contractor to its subcontractors when seeking their prices.

Worse than that, in many single-stage tenders, subcontract prices will not inform main contract bids at all because substantial elements will have been estimated by the main contractor without supporting subcontractor input.

Client benefits under the fair payment regime will be unlikely if using single-stage tendering

Nor will the client know whether information as to project bank accounts and fair payment practices has been passed down the supply chain and picked up at the point of bidding.

And once the price is set in a single-stage tender, there is no further opportunity to persuade the main contractor or subcontractors to reconsider their position.

This means that the only effective way of extracting value from the fair payment regime is for clients to procure their projects on a two-stage basis. This will enable, during main contractor selection in the first stage, the assessment of contractors’ payment procedures and their reaction to project bank accounts. It will also allow, during second-stage subcontractor selection, direct client influence over the way the main contractor procures the appointment of its subcontractors and communicates to them the fair payment practices.

If this second-stage process is undertaken on an open-book basis to build up a final set of designs and prices, the client working with the main contractor can ensure that subcontract tender documents reflect main contractor fair payment provisions. The client will also benefit from subcontractors ceasing to price for delays in payment and loss of retention.

As to the requirements of the Fair Payment Charter on the subject of two-stage procurement, these are surprisingly timid. The charter states that “companies will consider, where appropriate, operating relevant contracts on an open-book basis” – a heavily qualified proposal that would benefit from clarification as to how it will work in practice.

The efforts involved in revising contracts and training the industry on project bank accounts need to show tangible results, and to do so the fair payment provisions need to dig deeper into the procurement and contracting process than the Fair Payment Charter does at present.