Payment malpractice – is this the beginning of a crackdown?

Those with long memories in this industry might well be tempted to skip over the news just as they would be inclined to do if a new report popped up, promising another set of reforms. It’s fair to say, most with any experience of the way construction works have been here before.

But the scale of the letter-writing campaign says that, possibly, the government is getting an idea of just what a problem subcontractors, suppliers and smaller firms in construction face getting paid. Carillion has chivvied them into action, no doubt, and for that reason alone Dowden’s letter is better late than never.

Will a firm be given a warning that it faces being barred if it doesn’t buck up its ideas? Further still, will it be put in special measures until it improves? What would that actually entail? Nobody really knows 

Building has heard many horror stories of how firms get out of paying suppliers when they’re supposed to – from changing the address on where to send the invoice to problems with internal systems along the lines of “sorry, the IT system is playing up so the payment run’s been put back a month”. And on it goes.

One insider told this magazine recently of the goings-on at a well-known contractor. Staff, he said, were having to answer phone calls and reel off a new list of excuses.

While it’s difficult to prove that this is actually happening – short of listening in to these conversations – it’s not too difficult to imagine either. That’s almost as damning as the excuses being trotted out.

Dowden, or certainly officials at the Cabinet Office, have realised that this can’t go on. In his letter, he tells firms he’ll be keeping tabs on them thanks to the payment data they are now required to publish every six months.

He tells firms that those who cannot prove they pay their supply chain within 60 days are at risk of being barred from government contracts. “Suppliers who are unable to demonstrate that they have systems in place that are effective and ensure a fair and responsible approach to payment of their supply chain may be excluded from bidding,” he writes. “Many of you are due to publish your next report by the end of July and I expect to see you meeting the required standards and making improvements if necessary.”

And he adds that he’s not planning to go away on this one, warning: “My officials will keep me updated on your progress.”

But what happens if that progress is not very good? What then? For many, the carrot approach only works with a stick. The question is how heavy a stick to wield?

The acid test will come when a firm flunks the new required standards and is found to be hopelessly not up to scratch on paying its suppliers in a “fair and responsible” manner.

Some will want a statement, a sign that the government is really serious about getting to grips with one of the longstanding scourges of the industry. And for them that means barring a firm from winning work and making that news public. Will a firm be given a warning that it faces being barred if it doesn’t buck up its ideas? Further still, will it be put in special measures until it improves? What would that actually entail? Nobody one really knows and as ever the devil is in the detail.

In his letter, Dowden tells recipients that as signatories to “the Prompt Payment Code, you have committed to paying your subcontractors on other contracts within a maximum of 60 days (this is met by paying 95% of invoices within this period) and to work towards 30-day payment terms as the norm”.

We thought we’d take a look at just how many top 10 firms were meeting the 95% in 60 days target. The answer is none. 

Most people probably won’t be too surprised at the news, given that contractors still operate on wafer-thin margins and the industry’s biggest contractor, Balfour Beatty, talks about margins in excess of 2% as some sort of a triumph.

And here lies the rub. While the payment record of this industry is poor, the margins firms are expected to accept encourage this sort of behaviour. There is talk of ring-fencing margins on government projects at, for example, 5% and, the theory goes, payment malpractice would be cut out at a stroke.

There is a huge amount of structural change required in construction – and fair payment, margins and attracting a more diverse workforce are right at the top of the industry’s collective in-tray.

But simply blaming margins for everything is not good enough – and nor should it mean the government doesn’t at least attempt to do something about poor payment practice. After all, that is what a government is supposed to do: lead.

Let’s hope it does exactly that on this issue, so that Dowden’s letter doesn’t become another “been here before” moment.

Dave Rogers, deputy editor, Building