EP 149

From 120-Day Payment Periods to Fair Payment: Rudi Klein's Vision (EP 149)



This week, Paul is joined by Rudi Klein, the Director at Klein Legal and former chief executive at the Specialist Engineering Contractors (SEC) Group. Rudi was involved in piloting the ‘Construction Act’ through the UK Parliament and originated Section 112 of the Act dealing with the right to suspend construction contracts for non-payment.

Today’s show discusses payment abuse being the industry’s dominant business model and what we can all do to change this. We discuss 120-day payment cycles, the demise of Carillion and other large Main Contractors in the recent past, and we turn to Project Bank Accounts and Retentions to change the status quo.


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Paul Heming: Hello and welcome to episode 149 of the Own the build podcast with me, Paul Heming. We’re almost the big 150 and today, I am sharing an invitation to Tender template in the show notes. If your supply chain is kind of pre-qualified, your subcontractors are selected for each trade package and it’s time to issue the tender documents, we have created an invitation to tender template for you. It’s ready to customize and input your own project information, and you can download it in the show notes. P.s. if you want to change the way that you are working and digitize this process entirely, you should see C-link. You can see a demo in our show notes as well. Onto today’s show, and I’m particularly excited by this. So in the studio today, I’m joined by Rudy Klein, who is the director at Klein Legal and the former chief executive at the Specialist Engineering Contractors Group, SEC, where he was in place for I think 25 to 30 years. Rudy was actively involved in the piloting of the Construction Act through UK Parliament and originated section 112 of the act, dealing with the rights of suspension of construction contracts for nonpayment. You can see why I’m excited to have this conversation now. Can’t you guys? So, Rudy, welcome to the show. How are you?

Rudy Klein: Well, thank you, Paul. I’m very well, thank you. I hope you are too. I’m a bit disappointed, Paul, that this is not the 150th.

Paul Heming: Oh, I know. You’re almost there. You’re almost there.

Rudy Klein: But anyway yes, I’m keen to talk about payment in the industry. This problem never seems to go away. And we’re still talking about it over these years. It’s incredible, really.

Paul Heming: Yeah. I’ve been in the industry for 16 years now, almost 17, and my background is specialist contracting. So payment, well, for everyone, it’s a big thing, but at the further down the supply chain, I think it becomes even more sensitive, is maybe the word. And you know what, this is episode 149, not 150, Rudy, but we are gonna make it a belter.

Rudy Klein: Yeah, absolutely.

Paul Heming: Nonetheless. What I really like to do at the start of the show, and there’s loads of things that I wanna talk to you about around the act and so on. But just ground the conversation for us, if you can, Rudy, with your construction journey and how that landed you to be where you are today.

Rudy Klein: Well, I started out as a barrister, and then I became a law lecturer in a university. I’ve got a lot of teaching over the years. In fact, I still teach at Stuttgart University on a Master’s Degree in International Construction contracts. But my main preoccupation was as chief executive of the Specialist Engineering Contractors Group. This organization, we call it the SEC Group, represented the largest value sector in the industry. We represented engineering specialists, very high value inputs, but we were rather different perhaps from a lot of other trade bodies because we represented specialist engineers across the whole of the UK, Northern Ireland, Scotland, Wales, as well as England. We had SEC Group, Northern Ireland, SEC Group, Wales, and SEC Group Scotland, as well as the UK SEC group. We were also different from many other bodies because we were focused on driving change in the industry, not just around pavement, but around other things such as procurement, best practice and so on. And as far as change was concerned, I think we achieved a lot in that respect. And of course, we’re going to speak about some of it with you now. But the one thing perhaps I just should highlight, you mentioned the Construction Act course. Construction Act, one of the things that we achieved, but there were other things like Project Bank Council, which we’re also gonna be talking about. I should add in referring to the Construction Act here, I also provided the first draft of the Iris Construction Contracts Act, which came into force in 2013.

Paul Heming: Excellent. You have been quite simply a busy man, haven’t you? Rudy, I mean, there’s a lot of things to unpack there. And like you say, we’re gonna cover quite a few of them. Just so I’m absolutely clear. So you talk about the set group, and it’s the specialist engineering contractors group. Just give me like, a bit of a taste really, and our listeners of the kind of contractors that would be in that group. Like what you mean by specialist engineering contractors?

Rudy Klein: Well, I had a range of firms. The main grouping would be mechanical network contractors, so that would be the largest portion. But we had others, lift contractors, for example, steelwork contractors, heating, ventilating, plumbing. So we had a whole host of organizations representing firms that primarily we’re concerned with engineering. Towards the end, we broadened our scope to include for example, scaffolders. Because there’s a lot of engineering and scaffolding. And before I stepped down as a CEO, we were really starting to expand it into other areas. Now it’s very unfortunate because there’s no grouping out there that solely represents specialists. A lot of course, other specialist organizations are represented in a body called Build UK, but that organization is driven for the most part by the large main contractors.

Paul Heming: Yeah, 100%. And it’s really interesting talking to you about this. Can I ask, I mean, we’re gonna talk a lot about payment, and I guess this is a twofold question. Number one would be, from where does the passion come to champion or work with specialist engineering contractors or the specialist contracting segment of the market? And then why payment? Why is that such a thing? Probably a very much a leading question.

Rudy Klein: Well, I think there’s just two elements to what you just said there, Paul. I think the first element is that where does the passion come from? Well, I always have had an inner passion for driving change, was change and achieving change is very demanding on you intellectually. And that’s what I like. That’s what I need, and that has helped to drive me. But in terms of payment and payment abuse, and I should say, when I talk about payment abuse, I’m talking about abuse by dominant companies that insert owner’s terms in payment terms and contract long payment terms, and then join the course of the contract and end up not paying on time or finding reasons not to pay.

Paul Heming: And that could be client to main contractor or main contractor to subcontractor, right? It’s kind of the –

Rudy Klein: It could be at both levels. I mean, within the second group, in fact, we had some firms who actually acted as main contractors as well. But the one thing that really has stuck me over the years is the misery payment abuse inflicts upon businesses. I used to get calls from firms, not necessarily firms within the set group member, trade bodies, but even firms outside those. I used to get calls from firms, usually small businesses who have been bullied and treated appallingly. I mean, I do recall one firm rang me up, it was actually a husband and wife owned business. And the wife rang me up and she was in tears. And she said that we haven’t been paid our attentions by this company, bigger company, much bigger company. And the retention amounts owing were phenomenon, in fact, because they range over a number of different contracts that this little firm had with a larger company. And she was quite desperate. I’d say she was crying. She had been to solicitors, and fortunately she paid quite a lot of money just to get letters sent. But again, no resolution of the problem. And I said to her, look I tell you what, I said, I can’t deal with all these issues, but I said, clearly, you are very upset. I’m going to call this company and I assume you’re not gonna do business with ’em again. Because one, I’m gonna say to ’em, isn’t it gonna be too pleasant. So I rang the company, I think I spoke the MD or finance director, I can’t remember which name. And I said, do you realize that you owe all this amount of attention to this business? And they immediately responded and said, well, we haven’t been paid our attentions, we’re still waiting for our retentions too. I said, probably haven’t caught up with the change of law, but because we don’t have payment and paid now, so I’ll tell you what, I’ll give you a week to pay out or release these retentions, and if you don’t pay in a week, I’ll then start to take the first steps to wind you up. And they paid. And then the lady in question, she sent me a box of chocolates in the post. They were all crushed. But I did mine because I wrote back to, and I said, I am delighted for you. But it’s just, I mean, this is one of many examples, Paul, of the stress. It’s the consequence of payment abuse that we’re talking about, really. It’s the mental health impact, which is right across the industry running a business. You know, my brother runs a business, small business and the stress that he’s gone through, I should mention one other thing, of course. Mental health is a big thing, but there’s other things as well. You know, the impact on safety. I mean, Dave Ju hacker in a report in 2018 on building safety following Grenville, said, payment abuse, tension abuse causes people then to cut corners and then compromises safety. So it has this massive, it’s not the abuse itself, but I do remember, again, going back a few years ago, there was an Essex company, a firm of [inaudible] contractors. And there were four brothers involved running this firm. And they hadn’t been paid on a load of variations they had done for a very large company. I won’t mention the name of the company, but they had to take the matter to the court of appeal. And of course, as you can imagine, that was a long process. A lot of money. And while that process was going on, one of the directors committed suicide. So, it’s that kind of impact that has driven me really to try and address this problem.

Paul Heming: No, no. And I can see that it’s something from, well, just from the journey that you’ve taken and from what I see of your career and your experience, that it’s clearly at the forefront. I guess, I don’t necessarily want this conversation to feel like it’s a main contractor slanging conversation, which I don’t think that’s the intention. But I do think we need to be sensitive to it. I’m interested to understand on that example, because it’s a really interesting example whereby the main contractor hasn’t been paid and obviously paid when paid has been outlawed. But you talked in the article that’s gonna come out alongside this episode about payment abuse being the industry’s dominant business model. And you know, that example where the main contractor hasn’t been paid their retention, meaning that subcontractor hasn’t been paid theirs either. Now it’s obviously very different, isn’t it? If there’s 20 different subcontractors, what flows down reasons for non-payment, etcetera? But I guess just linking what you said in your article, the payment abuse being the industry’s dominant business model, that sentence on its own really stuck out to me. Could you describe precisely what you meant by that?

Rudy Klein: Yeah. The two, I suppose, types of views, talking about things I mentioned earlier, actually, Paul, the owner’s payment terms in contract. I mean, I saw contract actually recently where it stated that the main contractor owns the subcontractor retentions. Now legally, the retention money belong to the subcontractor. The main contractor here has put in the contract that it owns the subcontractor retentions and joined the course of the contract. Then also we have bullying and abuse, mainly in time taken to make payment. I mean, you’ve been a specialist contractor, you know as well as I do, that as you go through a contract and payments are late or becoming later, it’s very difficult.

Paul Heming: It gets worse and worse.

Rudy Klein: Yeah, to then do something about it. Yes, I mean, one of the things I was very much associated with was introducing section 112, the construction act, the right to suspend your contract for nonpayment. But that really is a difficult tool sometimes to deploy because one of the things you don’t want to do is then to have all the hassle associated with it.

Paul Heming: Yeah. And if they’re not paying you in full, but they’re paying you in part, it just becomes really complicated, doesn’t it?

Rudy Klein: It does.

Paul Heming: And you think that you’ve got the bullet, but you haven’t necessarily.

Rudy Klein: And you can’t be suspending every payment cycle just because, you know, monies haven’t been paid and they’re perhaps couple of weeks in arrear or late. But it’s a very useful tool, obviously in the more extreme cases of non-payment. But this is not an anti-main contractor issue because I recognize there are lots of client organizations and public center clients actually don’t pay when they should. The point really I’m making is this out there are a lot of good main contractors, regional main contractors that pay well and pay on time because they work with a lot of local specialist contractors and they know each other. Well, I’m talking about the very large contract organizations, you know which is tended to do, and the government tends to see its relationship with the industry as a relationship with these large –

Paul Heming: With the tier ones.

Rudy Klein: So, we must move to get the Construction Leadership Council, which is a government wango. It doesn’t lead anything to, certainly doesn’t lead construction. But the Construction Leadership Council, the co-chair of that, of course is the CEO of mace. And so there is this link, strong link, I think, between government and these large contractors. And I know for a fact that these large companies walk in and out of the department, the business department as and when, so they have an influence there, really. Which I think is entirely wrong. But the point really is, I said, I mean, if we go back to these big companies, if you take Carillion, I mean Carillion, when they gave evidence to the select committee, house commerce and business of that committee, they were moaning their directors were in fact the fact, well we are poor main contractors we only get 1% return or even less than that. Now, the thing is, if I was getting a 1% return in Carillion’s situation, I’d be delighted because the fact is they had billions of pounds worth of supply chain monies and it wasn’t the 1% was a return on their capital, it’s the return on the capital that was provided to them by the supply chain.

Paul Heming: Yeah. Well, you know Rudy, that actually, it’s a topic relatively close to my heart, and again, reading your article, it brought it all back, right? So Carillion, one of the last jobs I was working on, one of the last projects I was working on prior to setting up my current business, C-link, was Bat Sea Power Station for Carillion phase one. Absolutely amazing job. Now, when you look at it, absolutely beautiful. But they had, on that project, it was set up kind of just as we were starting a scheme with, I believe it was one of the very large banks where they were basically insisting that you had 120 day payment cycle. We were on 45 day payment terms, I think, but they put you to 120 days. If you wanted to get the money out on day one, you could, but you’d be charged for it. And if you wanted to get it out on day 45, you’d be charged a smaller amount. And it kind of like cascaded all the way through. And when we saw that, and we were a really large specialist contractor and we were turning over in the billion, so we were massive, we were like, this is a bit of a joke, to be honest, you how, like, how dare you know, like we kind of had a process that we went through, but in the end we kind of had to swallow it, but we swallowed it with zero impact to us. Because it just kind of guaranteed that we’d get paid on day 45. One of our subcontractors, they actually loved that scheme and they loved that scheme because, and I forget what the actual numbers were in terms of what you’d be charged. They could put in their application, get it approved, and on day one they could take out all of their money or be it, they would be charged X percent for the pleasure of it. Now, I don’t know if you were aware of that scheme itself, but how do you reflect on that? I mean, it kind of just shows you how bad payment terms are in construction, right? That a specialist is just desperate to get their money outta an organization and is willing to pay quite a hefty fee for that, for the pleasure of that.

Rudy Klein: Well, yeah. I mean, if the alternative is to wait 120 days, of course, you will. You’ll pay a fee for it to get it earlier. Because if you remember Paul, I mean the standard, Caribbean standard payment terms about 65 days as I recall, I mean, the fact you’ve got paid in 45 days, you’re flipping lucky. But 65 days was their standard. And then they pushed it out to 120 days almost immediately. And what happened was that Corian representatives were in 10 down the street with David Cameron. This would’ve been about 2012, I’m guessing now, but I think I’m about right there.

Paul Heming: Yeah. Which would’ve been round about the time we were signing our subcontract for first days of Basy Power Station.

Rudy Klein: Anyway, Cameron then issues a press statement and says, right, I’ve been talking to some of our largest UK companies of course, which included Carillion. And we’ve now agreed to help with payment to small businesses, to SMEs. We’re going to introduce the supply chain finance, and there would be some banks who would be happy to join up to this, like Santander and so on. Cause far the banks were concerned.

Paul Heming: Exactly.

Rudy Klein: They couldn’t care less. Now, for Carillion, this was heaven sent, it was heaven sent because of course they, this enabled them to have now cash for a lot, much longer period. And we would talk about billions here. But secondly, if you recall, Paul, at that time, the government was driving the project bank account initiative. And Carillion saw this as a way of justifying their opposition, which was total to project bank accounts. Because I mean, Carillion at the time were doing a lot of that work for the Defense of Estates organizations as it was then called. And the defense states were using project bank accounts, of course, which clearly absolutely hated because in fact they didn’t have access to their supply chains cash, but, so they came out Downing Street, rushed back to the headquarters in Wolver Hampton and told everybody that this was fantastic for the business. And of course it was, but it was a total utter scam.

Paul Heming: Yeah. Which goes back to the payment abuse being the industry’s dominant business model and that scheme being evidence of it. It’s really interesting, isn’t it? And you know, I wanted to talk about Carillion somewhat, but it’s not at the forefront of today’s conversation. But before we end for the first half, I guess just your reflections really, Rudy, so the demise of Carillion and their subcontract, their payment abuses is something which has been in the news in the not so distant past with the former CEO, Richard Hobson being given an eight year boardroom ban. Right? What are your reflections on that, and kind of to close out this conversation?

Rudy Klein: I was astounded that it would seem that’s all he’s getting and his colleagues, because the misery they infected upon the industry was just absolutely, as we all know 7 billion pounds. I mean, I was on a task group that was set up by the then secretary of State when the Carillion went bust. I mean, the impact was widespread. And even if firms didn’t go bust in the wake of the Carillion collapse, I mean, other firms were saying, well, all the monies that we had hope for future investment to improve the business to invest in skills, all the rest of it, we’ve now lost. We can’t do that anymore. That money’s gone forever. And really, we never get a measure of that kind of level of impact at all. But it was phenomenal. And of course, in the collapse, firms lost between half a billion, three quarter billion pound worth of retention. I mean, they were just massive. I mean, these people –

Paul Heming: It’s insane, isn’t it?

Rudy Klein: Oh, I mean, these people should be prosecuted for fraudulent trade trading, frankly, because they knew down well what was going on. And the auditors knew what was going on. It was. If somebody said to me that wasn’t criminal, I don’t know what is.

Paul Heming: Yeah. Well, I mean, it’s certainly those numbers are beyond eye watering, aren’t they? And you talk about the investment into R&D and so on of the sector, and we struggle at the best of times anyway, let alone when billions of pounds are wiped off monies rightly owed to the specialist supply chain. But we we’re gonna talk now in the second half about project bank accounts and a lot of other things. But we’ll take a break just here.
So Rudy, let’s now try and turn our attention to a more positive and optimistic view of life and maybe a way forward in the future. We were introduced, or I became aware of the work that you do when my co-founder at Cc-Link Prosper, Chris Barber, was really championing project bank accounts as a viable change that we should be making. Now I know that these project bank accounts are things that have been going around for quite a while, but really trying to champion it further down the supply chain on smaller projects, etcetera. So turning our attention to project bank accounts, something that you are very passionate about and you’ve already touched on, just very briefly, in 30 seconds, ground the conversation and remind us exactly what they’re.

Rudy Klein: Well, the model is very simple. That main contractor, as usual, submits an application to the clients. That application there, which is different from usual lists the monies owed to the individual named, subcontractors named as benefiting or will be benefiting from the project bank account. Once the client gets that, the client makes a decision on what’s payable. And when that decision is made, the money goes into an account, a bank account which is ring fenced by trust. In other words, that if the main contractor goes bus, the insolvency practitioner can’t get their hands on the money in the account and the monies in the account are paid simultaneously to everybody at all the same time.

Paul Heming: Really great. So just exemplifying it, you are Carillion, I am my old subcontract company. Project bank account. On that project, you as Carillion would save to your client, we’re gonna pay Paul X this month, we’re gonna pay Bob Y and we’re gonna pay Sheila Z. And it would be all filtered through, and then the client transacts through the project bank account and makes those payments ring-fenced for each contractor. Stupid question, maybe, but you said in the first half of the show, Carillion hated the idea of project bank accounts. Why? Well, actually, why did they hate them? And therefore, why do you really like them?

Rudy Klein: Let’s come to the positive bit. Why I like them? Because it means that the monies go directly to the supply chain. They don’t go, they wouldn’t go through the hands of Carillion. Cause if they went through the hands of Carillion, then you’d wait 120 days if you’re lucky. Some I’m aware of a company that waited 179 days to be paid, even with 120 day payment periods in their contract. So the Carillion just hated them because they just couldn’t get the hands of the money. And that was their business model. As indeed still is the case with a lot of these major companies. I mean not a lot has changed, I must say, since the Carillion demise.

Paul Heming: And so, could you then discuss project bank accounts and the National Highways where there is kind of like a case study as to why it works, how it works, and what is it that you can extract from that case study that we can all learn from?

Rudy Klein: Well, I think just if I may Paul, but just before I remark on that, over the years I’ve had loads and loads of emails from firms right across the country, how well PBAs have worked for them. So I’ve been fortified in my belief in this as a way of paying bill nobody.

Paul Heming: And those emails are client, main contractor and subcontractor, or just subcontractor?

Rudy Klein: Subcontractor. I did have one from a consultant as well who was paid out of our PBA. So consultants who were probably subcontractors to design and bill contractors, I would think. But in spite of the fact of course, that a lot of the major companies argue that PBAs were too expensive or were a burden. None of them, nobody has ever offered any evidence as to that. And the other thing, I would say now that after all these years, nobody has yet has come up with a much more effective way of making sure that people are paid properly and particularly on time. But coming to the National Highways case study, I mean, I must admit that National High Highways have done us proud, I would say roughly 20 billion of highways work has been paid through PBAs. And as a result, they have managed to ensure that down to level three of contracting, that everybody gets paid within 19 days from the assessment date or valuation date under the main contract. I mean, that’s an amazing achievement. And if National Highways can do this, the question I always ask myself, why can or anybody else do it? And it angers me because –

Paul Heming: I can see that.

Rudy Klein: Yeah, I mean it does, you know they’ve shown the way. I mean, when Carillion went bust, subcontractors work and the highways work were very lucky because for the most part, they got their monies. There was a few cases where that where they didn’t get all their monies, but most subcontractors were not affected in the aftermath.

Paul Heming: Because of National Highways projects where the National Highways were employing Carillion, they were employing them on a project bank account basis.

Rudy Klein: Yes, that’s right. But in addition, from National Highways perspective, national Highways have saved money using project bank accounts because the fact is that if you are a specialist contractor and you are gonna work for National Highways, you know they’ve got project bank accounts in place, therefore you can be a little keen on your pricing. So it has been to the benefit of National Highways, plus the fact of course, that the other element of that benefit has been that they don’t have people suspended, left, right, and center if money’s not being paid or any compromise or the quality resulting from poor payments.

Paul Heming: Yeah, I remember speaking to Chris about project bank accounts sat in the pub talking about it and talking about the beneficiaries, if you like, of project bank accounts. It’s fundamentally clear that it is a benefit to the subcontractors. It’s ring fencing, it’s protection. It’s quite clear from what you’re outlining here that there are benefits for the client as well. Cause as you say, national Highways potentially get more effective programs on time, better pricing, because subcontractors in the supply chain are keen to work with them because they know they’ve got that “insurance”, if you like. I guess my question is, what is the benefit to the main contractor and is that what is happening here as to why it’s not pushing through? Like is it really like a management contracting style or like a construction management procurement method that could be used to make this more attractive to the entire industry?

Rudy Klein: The first, I should say Paul, is that there are actually quite a few main contractors, and I know quite a few regional contractors who actually embrace project bank accounts. I do recall the chief executive of BFA Beatty once saying that project bank accounts were a benefit to main contractors too. But there’s been one or two others I can recall who have been very supportive. So it’s not all large contractors have been anti, the benefits that they’ve seen is in the response they get from the supply chains because the response they get from the supply chain is a much more proactive response, a much more collaborative response. I mean, after all, [inaudible] bank is not just about the money. If the money’s there, I mean, as the late, so Michael Latham said many years ago that if you are paid when you should be and you’re paid in the proper amount, that generates trust and the trust generates –

Paul Heming: Certainty.

Rudy Klein: Yeah, certainty. Collaboration. This has always been biggest factor in UK construction for years and years issue of payment because, in fact, it’s got in the way, it’s a major barrier to collaboration.

Paul Heming: It stifles collaboration, efficiency, research development, like forward thinking, everything.

Rudy Klein: Absolutely. Everything. You know, and I mean, over the years, I’ve judged construction awards and you know, you hear the word collaboration come in a lot. You know, we’re collaborating with, we collaborate with everybody, basically we collaborated with the cleaners, we collaborated with this, that, and the other. And you and I said, well, that’s fantastic. And I said, now one of the of course criteria for collaboration is actually whether everybody was paid out the same pot. Did you have one pot outta which everybody got paid? And of course the answer is usually no. I said, well, that to me is a real evidence of true and genuine collaboration. And as you write, you say, Paul, because we haven’t been able to crack this properly to the extent we needed to, that’s held the industry back. You know, and people go on about, I mean, the Construction Leadership Council recently published a report on productivity, I can’t remember who wrote the report, but hardly a mention of the fact that we need to clear up this mess on payment. Because if you don’t do that, how do we achieve better productivity?

Paul Heming: No, no. It’s all interlinked, isn’t it? And you know, just listening to you here and weaving my own personal experience of Carillion with what you’ve said and project bank accounts in the past, and now is the reason we are struggling almost that there is a bit of pushback in respect of, there has been, using your terminology here, Rudy, payment abuse is the industry’s dominant business model. We talked about the Carillion example, and it’s almost that to get to Nevada, if you like, with regards to project bank accounts, there’s got to be a complete decoupling with that business model. But there must be a lot of larger organizations who are perhaps in quite deep with those business models. And it is year upon year. So is there something in that?

Rudy Klein: Well, there is. I mean I have to apologize, Paul, you mentioned something similar earlier, and I should have picked up on it, but I will pick up on it now because there is perhaps a more fundamental approach to dealing with this, which is through procurement. I mean, one of the things I’ve been involved with over some years and supported over some years is a procurement approach called insurance backed alliancing. Now, insurance backed alliancing allows for the all key members of the project team to gather together from the beginning as part of an alliance, working with the client, and then with the client to agree on a cost plan. And as part of the alliance, I should say, they’re all directly engaged by the client, but to then agree a cost plan and in agreeing a cost plan to undergo a thorough assessment of the risks involved and how those risks are gonna be best managed, where the financial risk, technical risks. And once the cost plan reflects that, it’s the cost plan is ensured against overruns. And it’s brilliant. I mean, unfortunately what we haven’t been able to do is persuade the government to roll this out across government. I mean, there’s been a number of pilot projects done, and the results have always been very positive. But even if you don’t go down that road, you mentioned construction management earlier. Construction management course means that you get directly paid by the client. And there is a very good friend of mine in Scotland who chairs a charity. They’ve just done a new project and he’s made sure that everybody gets paid directly. And there the main contractor who’s a regional contractor up there in Scotland, all the contractor does, just to make sure the work has been done and the work can therefore be certified as being done and done according to the spec. And then it’s ready to be paid. And the client then makes the payment. I mean, France has had direct payments supply chain for many years in the event the main contractor doesn’t pay. I think Poland has recently introduced something along the same lines. So it may well be that one way of addressing this and cutting out all this need for payments to cascade down through the supply chain is for us to look carefully at the way we procure construction.

Paul Heming: Well, that makes sense to me.

Rudy Klein: Yeah. Move away from this traditional approach where you’ve got layers and layers of contracting fourth, fifth, six layers of contracting, if not more.

Paul Heming: Yeah, well, exactly. And that also decouples the main contractor with their traditional risk profile as well. It changes the risk profile for absolutely everyone involved. So supply chain, main contractor and client, and that kind of goes to the heart of my initial thinking on project bank accounts is that it’s difficult with the traditional procurement route and therefore can we tweak and update procurement routes to enhance and to accelerate that change.

Rudy Klein: Yeah, I mean, and I think we have to, but again, there seems to be a great reluctance to do this. I mean –

Paul Heming: The resistance.

Rudy Klein: Yeah, I mean, the government published two or three years ago now something called the construction playbook which is the government’s bible for procurement that was amend last year, last September. Now the document itself is absolutely fine. Nothing wrong with the document, but there’s no obligation upon government procurers to use it. But if they don’t use it, they have to explain why they’re not using it. But that’s it. And it’s the same with the government’s project, bank account policy that was introduced almost 13 years ago now. And that policy, very clear policies is that all government procurers must use project bank accounts unless the compelling reasons not to do so. The trouble is at the cabinet office responsible, administering the policy hasn’t policed it, so it doesn’t actually require government procures to provide the reasons. And even if they did provide the reasons, then they’re not challenged. There’s a similar system in Wales, but the Welsh government actually does challenge if these reasons, well, they require the reasons. If the reasons are not to scratch, they do challenge them

Paul Heming: And it makes it a significant impact. You know, there’s so much to talk about here. I guess to conclude on some of our conversation, really, I’m interested to understand almost a more optimistic insight that you might have into the future and interested to, like, almost what would your advice be to both I’m talking about private clients here as opposed to the government, but like clients for projects and principal contractors as to the benefits of project bank accounts and like how you can be more open to them and how you can really benefit from them?

Rudy Klein: Well, all they need to do is to look at the experience of National Highways and look at the benefits that’ve been achieved by National Highways, particularly say the reduction in cost, a more collaborative supply chain which gets over the problems that deemed you the Hackett referring to do with safety and where they have been in place. The reports that I’ve received via, usually via the governments like Welsh government, Scottish government, Northern Ireland, so on, have been using Project Bank council some time now, is that the impact has been positive. Public sector procurers have been very supportive of PBAs. But what I would say is that there are issues. I won’t want to gloss over everything here. There are some issues, for example, we’ve got problems with some of the banks who no longer providing PBA products. We also know that the know your customer arrangement that banks is quite a lengthy and laborious process, and a lot of banks are still insist on it, even though you’ve had project bank accounts with them before. One of things I’d like to do is to see how we can actually improve the process. And I’m working with a very small FinTech startup at the moment, Sable, to try and see what more we could do to digitize the process to make it much easier to set these things up, have them up and running as quickly as possible, so that at the touch of a button, you’ve got your PBA in place. And I think that really is the next thing how we use the technology that we now have available to make the whole PBA process easier. But maybe from that to go onwards and further and look at how we just simply make it easier for clients to make direct payments to the supply chain. I mean, that is perfectly achievable even now. It’s achievable. I mean, the only thing I would say is that to do that you’ve got to have their agreement of everybody, including the main contractor, but provides you have that really shouldn’t be a problem in making direct payments. As I say, a friend of mine in Scotland’s already doing it on one of his projects, so I think that is the way forward. And now that we have available to us digital processes to enable this, then I think we need to pursue it.

Paul Heming: I actually couldn’t agree with you more, to be honest with you. And believe it or not, really, in a few weeks’ time, I will be interviewing a founder of a company who is trying to introduce digital payments, project bank accounts, and to systemize all of that to make it a lot easier for us to do. So you will have to, along with everybody else, be tuning in two to three weeks’ time because I think it’s technology that is much needed. And I’d just like to thank you really, Rudy, for your candor and your honesty in this conversation because, and for championing the position as well, because I think it’s clear when I first heard about project bank accounts, I wasn’t overly optimistic about them, if I’m honestly, in terms of my instant reaction to them. But more and more as I learn about them, more and more I think that they are absolutely the way that the industry needs to go can go. And to be honest with you, in some respects, you do need the tech stack to catch up with it, but it’s the mentality as well, and maybe even the procurement practices that we need to adjust and tweak to make them possible. But thank you so much for coming on the show. I’ll obviously leave your details in the show notes, and yes, I will also be sharing the article that you’ve written for us and thank you for joining us and giving us your time.

Rudy Klein: Well, thank you so much, Paul. I’ve enjoyed the chat.

Paul Heming: No, the pleasure is all mine. I’ll speak to you soon, Rudy. And guys, I will speak to you all next week. Have a good week ahead.

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