Without payment secuirty, collaboration in construction is a pipe dream

Payment abuse in construction often involves horrendous commercial bullying, and unfortunately, this has been part of the construction landscape for many years. It has damaged productivity, compromised building safety and quality, stunted investment in training and innovation, and increased mental stress and illnesses.

As everybody accepts, including the Government, the key driver for payment abuse is the industry’s dominant business model, which depends upon firms’ ability to maximise their cash flow and, in doing so, deprive their suppliers of desperately needed cash.

This is much worse because most of the construction value is delivered by supply chains comprising medium- and smaller-size firms. Furthermore, payment cycles usually commence with on-site work, which means that firms carrying out off-site manufacture have to wait months before payment even though the bulk of their contract value has already been expended.

All of this was highlighted in the aftermath of the Carillion collapse, a company which treated its supply chain with contempt, according to a House of Commons Select Committee report. Carillion had 120-day payment cycles with the option of being paid earlier for a fee.

Over some years, I have campaigned for using project bank accounts (PBAs), which have proved to be highly successful in safeguarding the cash intended for suppliers. National Highways now use PBAs as standard on all their projects with the result that all subcontractors are paid within 19 days of the assessment(valuation) date under the main contract. The Government’s policy is that they must be used unless there are “compelling reasons” not to use them. But there’s little attempt by the Government to enforce this policy and demand that any department, agency or non-departmental body provide their compelling reasons for not using PBAs.

The other major issue is retention. A government report published in 2017 revealed that suppliers were losing almost £1m worth of retention monies per working day due to upstream insolvencies. The majority of respondents to a consultation held by the Business Department (which closed in 2018) wanted statutory protection for their retention monies; that is, the monies should be stored in a segregated account protected by the trust. Five years later, the Department and its useless offshoot, the so-called Construction Leadership Council, hasn’t done anything to implement this despite a Private Member’s Bill, which garnered the support of almost 300 MPs for legislation to protect these monies.

With an impending change of Government, there is now an opportunity to put matters right. There should now be legislation to mandate using PBAs across the public sector and to ring-fence retention monies.

About Rudi Klein

Rudi Klein is Chief Executive of the Specialist Engineering Contractors’ (SEC) Group, an umbrella body representing the interests of 60,000 firms in the specialist engineering sector. He is also an adjudicator on the Adjudication Panel of the Chartered Institute of Building (CIOB). He has lectured extensively on legal and contractual matters. He is an honorary member of the Society of Construction Law.