Payment abuse: Won’t pay, must pay

Over a year ago I wrote about the then recently launched Construction 2025 (Building, 7 August 2013).  This was the strategy for turning the industry into a powerhouse for growth by 2025.

To realise this strategy, I argued, three structural deficiencies had to be addressed.  One of these was the business models of the largest UK contracting firms which, together, sub-let the bulk of the work. The rickety state of their balance sheets cannot continue to sustain the extent of their enforced borrowing from their supply chains. If the proposed merger between Carillion and Balfour Beatty had been successful (and even if Parsons Brinckerhoff had been retained) their combined debt would have been £1bn. It’s no wonder that payment abuse has become embedded in the industry’s DNA.

It was against this background that the Payment Charter – one of the 2025 actions – was launched in April this year.  Many have observed that the likelihood of the charter making a difference is, at best, naive.  Others such as Laurence Cobb of solicitors, Taylor Wessing (Building Blog, 1 August), argue that the charter is unlikely to have much impact unless effective enforcement measures are in place. I’m in Laurence’s camp. The question is: what should those measures be?

The first thing to insist on is that compliance with the charter must be driven by government.  This can be done by appointing a charter ombudsman with resources to monitor, audit and report on the extent of compliance. The ombudsman should have powers to investigate and challenge non-compliance either on his/her own initiative or in reaction to complaints. The latter is less likely because of the climate of fear in the industry which prevents firms from complaining about poor practice.

Only a properly resourced enforcement process can send out the message that you could be left out in the cold as a non-signatory

It would be preferable if the ombudsman was to be appointed under statutory powers. There are two opportunities for this. The first is the Small Business, Enterprise and Employment Bill which is about to enter committee stage in the House of Commons. The ombudsman’s powers could be modelled on those given to the proposed pubs code adjudicator under this bill. The bill provides for a pubs code adjudicator to enforce a pubs code - a good practice code – between the breweries and their tied tenants; clause 46 gives the adjudicator power to impose penalties for non-compliance.

The second legislative opportunity will arise when legislation is introduced at the end of the year to transpose the revised Public Procurement Directives into regulations. Incidentally the revised directives give member states the option to introduce direct payments in the event of failure to pay by the lead contractor.

The charter anticipates a degree of enforcement. Signatories agree to apply the 11 commitments, to be monitored for compliance against KPIs (still to be published) and to take the extent of compliance by others into account when they, themselves, are awarding contracts.

The easiest approach would be to require that all firms wishing to bid for public sector works and/or services in England are charter signatories – this should be a pre-qualifying requirement. The private sector should be encouraged to follow suit.

Each signatory would then have to provide data on their own performance against the KPIs. This will need verifying.  Failure to provide the data should result in the offender being removed as a signatory. Clause 3 of the Small Business, Enterprise and Employment Bill will, in any event, require large companies to provide data on their payment performance. 

Continued non-compliance should result in a warning of exclusion from future bidding. The revised Procurement Directives will enable past performance to be taken into account as a pre-qualifying criterion.

This is all leading to a need for a properly resourced enforcement process. Only this can send out a powerful message that you could be left out in the cold as a non-signatory and that non-compliance has potentially serious consequences. 

Seven years ago this month the (then) government launched a Payment Charter for central government construction. There was no enforcement process. Three years later the Cabinet Office had abandoned it. Instead it mandated strict payment times and project bank accounts on government procurement.  Somewhere in this there is a lesson to be learnt.

Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors’ Group