Keeping the cash flowing

Good supply chain cashflow is a pretty fundamental part of ensuring that a construction project runs smoothly and yet the construction industry continues to be dogged by problems with late payment. This persistence is unfortunately rooted in the fact that there are all kinds of advantages to be gained in structuring payments in certain ways which do not result in prompt and timely payment lower down the supply chain such as cash retention which is particularly prevalent in times of economic downturn.

Over the years, various pieces of legislation have been introduced to try and address this issue including the Housing Grants Construction and Regeneration Act 1996, the Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Debts Regulations 2013, and yet the problem still exists.

So the government-backed Construction Leadership Council’s April 2014 construction supply chain charter is the latest initiative to be launched to try to address this problem head-on with signatories to the charter agreeing to that all new construction contracts from 1 January 2015 will meet 11 fair payment commitments including:

• Correct full payment to be made as and when due for all work properly carried out, or products supplied, in accordance with the contract. Any withholding of payment due to defects or non-delivery to be proportionate, and clearly, specifically and demonstrably justified in line with the arrangements set out in the contract.
• Payment to not be deliberately delayed or unreasonably withheld.
• For all new contracts payments to be made to the supply chain not more than 60 calendar days from the end of the calendar month in which the work is carried out or products are supplied. From June 2015, payments to be made to the supply chain not more than 45 calendar days from the end of the calendar month. From January 2018 that will decrease to not more than 30 days.
• Pay Less notices will be issued at the earliest opportunity and no later than 7 days prior to the final date for payment.
• Processes will be put in place to enable the effects of contract variations to be agreed promptly and fairly and payments for such variations to be included in the payment immediately following the completion of the varied works.
• Project Bank Accounts (PBA) will be used on central Government contracts unless there are compelling reasons not to do so and on other contracts where appropriate.
• A transparent, honest, and collaborative approach will be adopted when resolving differences and disputes.

The charter is undoubtedly a worthy endeavour but the key question is: will it gain traction in the construction industry and improve supply chain payment? Looking at the mixture of industry reaction so far the answer unfortunately has to be along of the lines of: probably not unless it is given some teeth.

The fundamental problem is that this is a voluntary scheme. The charter commitments took quite a while to agree and even now it is telling that not all CLC members have signed up to the charter. Notably, there is quite a bit of push back from a number of contractors primarily because the charter advocates the extensive use of PBAs which can be bad for contractor balance sheets and overly administrative for small projects. The lack of universal support does not bode well and neither does the lack of penalties for failure to comply and absence of enforcement measures.

So in conclusion, the charter is a good idea but it is a rather unfinished affair. The danger is that it lacks the clout necessary to withstand the rush caused by the construction recovery where businesses are simply concerned about tendering for work. It can be queried whether the launch (without a finalised monitoring regime) was premature? To make any long term impact, the charter is clearly going to need some teeth and enforcement powers but who the teeth will belong to and what the enforcement measures will look like remain to be seen.

Whisper it quietly, and try to be positive, but in an industry where there are many different players, a push for fairness and the need for cash are not easy bedfellows.

Laurence Cobb is head of construction at law firm Taylor Wessing