Prompt payment: The other credit crunch

Click here if you want to be paid ever so quickly - 31 construction folk already have. They’re big names, too - Balfour Beatty, Morgan Lovell, Overbury…

Let me tell you what’s going on. Mark Prisk, our construction minister, wants you to be paid within 10 days. And he, or rather all those government departments buying building work, have decided to convert the “fair payment charter” from non-binding advice to mandatory requirements on all public sector contracts. He says on the Prompt Payment Code website: “Prompt payment is critical to the cash flow of every business …” So click his web button to apply.

The truth is that there is a widespread practice of ’obliging’ the supply chain to give extended credit. It’s always been the way of things, like it or lump it. But the government is saying it will not tolerate it any longer

Now then, things on the cash flow front have always been tricky in construction, but especially so in the past two years. How many times have you said, “if only my customers paid me on time, I wouldn’t have to creep on hands and knees to those bankers”? Well, those folk in parliament have seen how easy it is to pay for building work at speed, relieve the pressure and so reduce borrowing.

Let’s get down to brass tacks. The biggest client in the land, the government, makes a pledge to pay you as main contractor in 10 working days (or 14 calendar days). That’s called employer-to-tier-one. So, at the outset the valuation date/assessment date is specifically identified (that’s what we have been doing year in year out). By then you will have made your application for payment. The contract administrator/architect/PQS/project manager now has seven days to assess (it’s called argy-bargy time), then out comes the certified sum and that’s the “due date”. Then a BACS electronic payment must be made to you tier one folk within the 10 working days. And there’s to be monitoring. There’s to be an obligation on the project manager under NEC, on the contract administrator under JCT, on the watchdog under PPC2000, to keep an eye on that 10-day rule.

Ready to click? There’s more. The tier one contractors have to treat the tier two firms as they were treated. So the contract between main contractor and subcontractor has to have the same valuation/assessment of the account date as in the main contract. The subcontractor is to make its application for payment in time for it to be included in the main contract application for payment. The subcontract “due date” is to be the same as in the main contract. The BACS electronic payment from the main contractor to its subs is to be not later than 19 calendar days from the common due date. The watchdog is to watch the behaviour at this level, too.

The truth is that there is widespread practice of ’obliging’ the supply chain to give extended credit. It’s always been the way of things, like it or lump it

Many tier two subcontractors sub-subcontract parts of their work. Guess what? That sub-subcontract is to have the same common valuation date; meaning the sub-sub is to put in its application to the subcontractor in time for all of that to go in the main contract application for payment, and all in time for the certificate on the common due date (are you keeping up?). And then, the sub-subcontractor must be paid by BACS electronic transfer not later than 23 days from the due date. Phew! And yes, the watchdog is watching and reporting on all of this to the employer.

What happens if the main contractor says to its sub, or the sub says to its sub-subs: “If you want this contract, you will agree to give me 90 days credit”? “Well,” says the Office of Government Commerce (OGC), “it is necessary to take steps to abolish the use of extended credit terms.” Wow. That sounds like a big fat piece of legislation. The truth is that there is a widespread practice of “obliging” the supply chain to give extended credit. It’s always been the way of things, like it or lump it. But the OGC is saying it will not tolerate extended credit, at least not on its building projects. Those folk who draft and re-draft JCT, NEC, PPC2000 and the rest are, rumour has it, all ready to print amendments to bring in the “common payment dates” and the 14, 19 and 23-day payment rules. The watchdog is ready to examine the subcontracts and sub-subcontracts to root out any changes to these payment rules. So, if “taking steps” is not legislation it is straightforward commercial knuckle-wrapping for tampering with the new payment rules. The deal is that you get paid super-fast and you pay super-fast. Ready to click?

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings Temple