The success of the new Supply Chain Payment Charter announced this week by the Construction Leadership Council rests on how well it is enforced, says Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group.
Commenting on the Charter’s commitment to reduce payment terms to the supply chain to 30 days from January 2018, Klein said: “If the Charter is to deliver change (rather than being simply aspirational), then compliance and enforcement are essential.
“I believe there should be a ‘yellow card/red card’ system operating in the public sector. If there is non-compliance with the Charter the offender should be warned and required to comply. Failure to heed the yellow card should result in a red card, which means that the offender will be disqualified from working in the public sector for two years. If a firm has not signed the Charter it should not be able to pre-qualify for public works contracts.”
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“If there is non-compliance with the Charter the offender should be warned and required to comply. Failure to heed the yellow card should result in a red card, which means that the offender will be disqualified from working in the public sector for two years.”
Rudi Klein, Specialist Engineering Contractors’ Group
Philip King, chief executive of the Institute of Credit Management, is currently working on the development of monitoring arrangements for the commitments made by signatories to the Charter, due to be published on 22 April.
Early signatories are expected to include major clients and contractors represented on the Construction Leadership Council, including Barratt Developments, British Land, Sainsbury’s and Berkeley Group, as well as Kier and Laing O’Rourke.
Despite the number of major clients on the Construction Leadership Council, Klein believes that the private sector will be a lot more difficult to police than the public sector. He suggests that Vince Cable – as co-chair of the Construction Leadership Council – should write to the top 100 private sector clients to invite them to sign the Charter and enforce it along the supply chain.
Klein supported the Charter’s aim of getting rid of retentions, by a deadline of 2025. However, he was not absolutely convinced that this would happen across the board, suggesting that the UK industry would need legislation – as exists in other countries – to protect each return. “If you require a cash retention you should issue a bank guarantee to ensure that the cash is available when it is due for release,” said Klein.
The full Charter is due to set out 11 “Fair Payment Commitments”. As part of the commitment to reduce payment terms to a supply chain to 30 days from January 2018, the charter also sets out stages before this: terms of 45 days from June 2015, and 60 days with immediate effect.
Other commitments mentioned in a press release from BIS this week include not withholding cash retentions, not delaying or withholding payment, and making payments electronically.
Any organisation that becomes a signatory to the Charter agrees to apply the fair payment commitments in its dealings with its supply chain; to be monitored for the purposes of compliance by reporting against a set of agreed key performance indicators (KPIs); and to consider the performance of its supply chain against those KPIs when awarding contracts.
Despite a number of main contractors looking to support fairer payment practices, overcoming the industry’s age-old late payment regime will be a challenge to many contractors’ business model.
A government-commissioned study last year by Graham Ive and Alex Murray of the Bartlett School of Construction and Project Management, UCL, revealed that most main contractors are under-capitalised, forcing them to retain cash flow for as long as possible.
They reported: “Construction firms take much more trade credit from their suppliers (two to three times as much, depending on the measure used) as a proportion of their balance sheet than do firms in the rest of the economy. They also give much more credit to their customers as a proportion of their balance sheet.”
