Value discount payments are counterproductive

My overwhelming, some would say naive, optimism for the future of our industry was dashed again this week. On learning that the government was inviting key contractors to sign a memorandum of understanding to “re-engineer procurement and service delivery” and the Cabinet Office is looking for a “greater focus on value for money”, I foolishly thought this would be the driver for the industry to implement some of the recommendations that stretch back almost two decades.

Clearly this was my misunderstanding, as one of the first contractors to sign the memorandum has taken “re-engineering procurement and service delivery” and “better value” to heart and asked its supply chain to help; by introducing what Carillion politely calls “volume discount payments”. The specialist contractors I have spoken to call them something far less polite.

A volume discount payment is sometimes called a rebate and is, in real terms, a price cut. In one particular case it is one hell of a cut, a 20% cut to be exact. During 2011, 2012 and 2013 any subcontractors that have signed up to these “re-engineering” and “better value” principles will be required to add up what they have been paid in each quarter and pay back up to 20% of it. And, to add insult to injury, despite Carillion’s payment terms in this example being 65 days they require their volume discount payments from subcontractors within 30 days. Scottish Water runs a similar rebate and requests payment within 28 days with the value to be rounded up to the nearest £1,000 - though at least it pays in 30 days. Clearly both understand the concept and importance of fair payment but some see it as a one way street with all the traffic heading their way.

Better value can be achieved through a more collaborative and integrated industry. Meaningful value engineering can only happen with the involvement of specialists that understand the latest technology and know what works; by reducing waste of time, resource and materials; by skilling the workforce to deliver to the highest standards while meeting health and safety expectations; and by paying promptly and eliminating unnecessary financing costs.

If we implemented those recommendations that the majority seem to think are sensible, we might actually be able to deliver the better value required, “share mutual respect, trust and commitment” and “promote an enjoyable, rewarding and healthy working environment”. Would you believe it, these exact words were contained in the same document that asked for the rebate.

Suzannah Nichol is chief executive of the NSCC

Read an analysis of passing cuts on here.