Balfour Beatty has confirmed it is running a three-month pilot on “supply chain finance”, the controversial mechanism that gives subcontractors access to sums owed by Tier 1 contractors earlier than the contract states in return for paying an interest charge.
The pilot is being overseen by Balfour Beatty’s new director of procurement and supply chain management, Martin Chown, and is a response to the government’s Supply Chain Finance initiative to open up access to finance for SMEs.
Last year Carillion also launched its Early Payment Facility under the government’s Supply Chain Finance banner, a move that caused controversy because it meant subcontractors having to accept 120-day terms.
And contractor Kier has confirmed to CM that “we are going to get involved”, although it is not part of the group convened by government.
The pilot began in March and will run to June, when it will be evaluated by Balfour Beatty and the suppliers involved.
Balfour Beatty said it would approve invoices for payment earlier than the dates set out in the contract terms, and the supplier would then access the funds, paying “a lower rate of interest than it would be likely to get in the market”. It has yet to be revealed what the payment terms will be.
It also said that “the pilot is operating on the same payment timeline terms as they currently utilise across the business”.
120-day terms
A feature of the Carillion scheme is that subcontractors have to convert to 120-day terms “on paper”. Carillion has stressed that this simply means it has 120 days in which to pay the face value of the invoices to the bank offering the facility – but this puts it in a better financial position than if it had to settle invoices at Day 30 or Day 60, for example.
Rudi Klein, chief executive of the Specialist Engineering Contractors Group, linked the sudden spread of supply chain finance in construction to the low cash balances of the industry’s top contractors and the increased take up of Project Bank Accounts. One effect of PBAs is to reduce the amount of time project cash is available to main contractors.
Klein said: “It’s driven by under-capitalisation. The cash balances of the largest contractors have fallen so low and that’s what they’re trying to address. Presenting it as ‘something the Prime Minister has asked for’ just gives them an alternative way to describe it.
“What I can’t understand is, if they’re approving the invoice early, why can’t they just pay it? They’re still basically asking the supply chain to be their bankers.”
At business adviser Grant Thornton, partner Ian Corfield anticipated that supply chain finance would take off in construction, “but it wouldn’t be an explosion”.
He agreed that it could create a slight financial advantage for the Tier 1 contractor. “The average construction company is making a net margin of 1-1.5%, so anything they can do to improve their cash flow is worthwhile. With supplier [supply chain] finance, you’re talking small percentage movements, but that can mean a big absolute number. Each organisation runs their cash position differently so it’s hard to predict the effect exactly. But it means that every month Carillion makes one payment to RBS [the bank running the facility], not 1,000s, so it should simplify their business.”
His view was that supply chain finance could benefit SMEs in the supply chain as long as they examine and fully understand the small print. “The money will only be available for drawdown if all the paperwork and governance is fully agreed – you can’t just fire off a payment application. It won’t shorten the payment cycle unless you have good paperwork.
“That said, the interest charges for supplier finance are still relatively expensive, so the small supplier needs to balance the pros and cons of applying for this facility, or managing cash flow conventionally.”
