27th January 2016
In recent posts we have addressed issues affecting the construction industry as it experiences growth. A common factor with the issues highlighted is fair payment practices. Here we speak to Suzannah Nichol MBE, Chief Executive of Build UK, to discuss this problem
What’s wrong with current payment practices within the industry?
“There are reports that recommend how fair payment practices should work, but there is no clear industry agreed process, which outlines recommended procurement, contracting and payment terms. We have industry contract bodies, but the way we write the contracts isn’t always collaborative, and they’re very often amended.
“For example, a main contractor will pay in extended payment days, on the basis they’ve not been paid themselves, or because of the way their business model is structured. A steelwork contractor will often not be paid until their steel is bolted together onsite, but they’ve had to put in the order for manufacture possibly, weeks, months before. What we have to do is find a business model and payment practice that works for better for the industry.”
Why has it become such a problem?
“Fair payment is an issue because of the way cash flows, or doesn’t flow through the supply chain. This influences behaviour and compromises performance all the way along, and it’s always been a problem. If we go back to industry trade body records, about 100 years ago payment was an issue yet we’ve never collectively agreed how it could work effectively and presented the proposition back to our industry’s clients.
“It continues to be a problem because we’ve not yet had an honest debate about why businesses behave the way they do and ’what good looks like’. Only then can we determine what would be an appropriate business model and payment practices. We need to agree on a model whereby the client gets the building they’re prepared to pay for, which might not be what they’re asking for but is what their budget allows for. We also need to ensure everybody is involved at contract level and understands the shared objective. We can then work out how the cash would flow through the supply chain so everyone in that relationship benefits.”
Is the UK Government doing enough to help the construction industry implement fair payment practices?
“The Government has agreed it wants to see fair payment and that it is inappropriate to perpetuate unfair payment terms. The Construction Leadership Council has published a Construction Supply Chain Payment Charter* which sets out what fair payment means to the majority.
“In line with legislation and in the payment charter, the Government, as a public sector, is required to pay within 30 days, but it’s not as clear cut as that. At present it’s very difficult for us and for contractors, to find out if a project is publicly funded. This is due to devolved administrations and the way money is passed through to local authorities and organisations such as the NHS, which use different procurement methods. This makes it very difficult to find out the original payment terms. We’d like to see the Government identify every project as a fair payment project, providing real clarity on where they’re spending what is in effect tax payer’s money and showing they’re spending it in accordance with the Payment Charter.
“The Minister of State for Business and Enterprise Matthew Hancock MP has also announced in a written statement to Parliament that large companies will be required to report on their payment practices from April 2016. This will include reporting on standard and actual payment terms, and not just contractual terms, making it is easier to see how fairly supply chains are being treated.”
How could solving the issue of fair payments benefit the construction industry?
“For every £1 invested in construction, 92 pence is retained in the UK and generates £2.84 in economic activity. If that cash properly flows through the supply chain, we can grow the local and national economy. Solving the issue of fair payment through the supply chain would also reduce unnecessary costs businesses take on as a result of borrowing money or being paid late.
“We are a fantastic industry, we are an enabling industry, nobody can operate their business without construction because we build the factories; we build the roads; we build schools; we build everything. Without construction our economy cannot operate. If we can operate efficiently and effectively, it can only be good for all construction businesses and the economy as a whole.”
About Suzannah Nichol MBE
Suzannah Nichol MBE, Chief Executive of Build UK was awarded an MBE in 2005 for services to construction. She previously worked for NSCC and the Construction Confederation.
About Build UK
Build UK was created in 2015 from the merger of UKCG and NSCC. It provides a collective voice for the contracting supply chain in construction, bringing together the industry’s largest Main Contractors and leading trade associations representing over 11,500 Specialist Contractors.
*The Payment Charter, published as part of the Industrial Strategy: Construction 2025, sets out the industry’s ambition for payment terms of 30 days by 2018 and no cash retention by 2025.