Tackling the late payment epidemic: a new prescription from the government?

Market surveys in the wake of the collapse of Carillion suggest that protecting cashflow is still a priority for contractors, as they struggle to manage risks which had not been fully allowed for in the tender prices for projects bid at the tail end of the last recession, and the market deals with the uncertainties of Brexit.  

Research published recently by the Federation of Small Businesses (quoted in the House of Commons joint select committee report on Carillion’s liquidation) indicates that the issue of late payment is not limited to the construction industry but is embedded across the economy, with only 4% of small businesses who responded reporting that payment terms have been improving, while over a third state that agreed payment terms have lengthened in the past two years.

This is not how things were supposed to shape up in the face of the longstanding campaign by governments and industry leaders to encourage prompt payment without resorting to compulsion. Official efforts to date can be characterised as “nudging” businesses towards prompter payment. Encouraging membership of the Prompt Payment Code has been a prominent limb of this strategy. This cannot be a complete answer, as demonstrated by the fact that Carillion was a signatory of the code, notwithstanding the 120 day payment terms with which they were associated (albeit with shorter payment terms for suppliers willing to agree an early payment discount).  

Late payment is not limited to the construction industry but is embedded across the economy

The Prompt Payment Code has been complemented by the Reporting on Payment Practices and Performance Regulations 2017 which have been in force for just over a year. The underlying philosophy of this legislation is a belief that reliable information about specific companies’ payment performance will shape market behaviours. However, there has been little evidence to date that the Regulations are influencing companies to improve their payment practices. 

It seems clear that the government is now determined to ratchet up the prompt payment campaign, as presaged by the Chancellor’s call for evidence on late payments in the Spring Statement, and the Cabinet Office’s recent announcement that it plans to exclude suppliers with poor payment practices from winning major government contracts. Judgment will need to be reserved until it discloses what criteria and thresholds it intends to use for this purpose.

There is a precedent in Western Australia for legislative intervention targeted at the construction industry to impose a cap on payment periods. Under the Construction Contracts Act (as amended in 2016) payment periods under any construction contract in that state can be no longer than 42 days from the date payment is claimed. The UK government will no doubt monitor with interest any reports on the impact of this legislation.  

The reception of the recent government consultation on the closely related issue of retention has fuelled expectations of government intervention which goes beyond “nudging” the market. Build UK (which includes a number of major clients as well as contractors among its members) and the Civil Engineering Contractors Association have jointly called for legislation to ensure there is zero cash retention within the industry by no later than 2025, while being open to other solutions to protect the interests of all concerned.

The Construction (Retention Deposit Schemes) Bill which was introduced by Peter Aldous MP under the 10 Minute Rule and is due to have its second reading shortly, has more limited ambitions than outright abolition, but would empower the government to introduce regulations requiring retention monies to be held in a deposit account which secures the payee’s interest in the event of an upstream insolvency.  

As a private member’s bill, it would be extraordinary if the Bill finds its way onto the statute book in its present form, notwithstanding the support of over 100 MPs, among them Ken Clarke, Vince Cable and Anna Soubry. However, the Bill adds to the climate of expectation that the government will find time in its Brexit dominated programme to introduce legislation which will make fair payment mandatory.

The limited achievements of the government’s efforts over the last 10 years or so to “nudge” the construction industry towards fair payment practices suggests that the industry should prepare for this.