Opinion

Late payment – change the business model or shame the culprits

Infrastructure Intelligence readers Simon Murray of Acumen 7 and Innovate UK director Stephen Gibson wade into the debate about a new payment charter.

New business models, integrated supply chains and innovation

I congratulate Nelson Ogunshakin on his bold assessment in last week’s Infrastructure Intelligence of the iniquities of late payment of suppliers in the UK construction industry.  Nelson touched on most of the issues and even elicited a swift if somewhat limited response from the Government’s chief construction adviser Peter Hansford

I still don’t understand why a Government that claims to be committed to fair dealings with suppliers proposes to replace project bank accounts with a voluntary charter on fair payment that doesn’t come into full effect until 2018. 

"Late payment of suppliers is hard-wired into most contractors’ business models.  I don’t blame contractors for this.  Decades of flawed procurement practices based on obtaining the lowest possible price to build a project designed by consultants have reduced many contractors to operating as brokers."

There is no doubt that some clients rely on late payment of their contractors to finance their projects.  But the more widespread and damaging practice is the late payment of suppliers and sub-contractors by the same Tier 1 contractors even when their clients have paid them promptly. 

Suppliers that own factories and employ skilled workers have to finance the cash shortfall created by late payment.  And the cost of this finance often reduces investment in innovation and training and ultimately feeds through into higher prices for their products and services.  Late payment is constraining the development of the UK’s construction supply chain.

Late payment of suppliers is hard-wired into most contractors’ business models.  I don’t blame contractors for this.  Decades of flawed procurement practices based on obtaining the lowest possible price to build a project designed by consultants have reduced many contractors to operating as brokers. 

Contractors survive in the narrow gap between the price they tender and the prices they can obtain from their supply chains.  And in a highly competitive market this brokerage business model inevitably leads to wafer thin margins and reliance on the positive cash flows generated by asymmetric payment terms to finance contractors’ businesses.

If Government is serious about fair payment in the construction industry, it should take action on the projects it finances.  Project bank accounts are a step in the right direction but they are dealing with the symptoms rather than the disease.  A sustainable solution will require new approaches to procurement that allow contractors to earn reasonable margins by working with their suppliers to develop and deliver innovative solutions to our infrastructure needs. 

London Underground has pointed the way with their use of innovative contractor engagement (ICE) to procure the upgrade of Bank Station.  Government should build on this first step and encourage the development and adoption of new procurement practices.

In the executive summary of the Infrastructure Cost Review published in December 2010, the Government wrote: 

“The immediate challenge is to find ways for government and other infrastructure providers to work effectively with the construction supply chain to develop new business models that will improve productivity, achieve better supply chain integration and promote innovation.”

Nearly four years on, maybe the time has come to do something about this.  Better late than never.

Simon Murray, member of the acumen7 network           

 

 Big players have a vested interest not to change

I run a small civil engineering consultancy business and strongly support the views given by Nelson Ogunshakin and the ACE. 

It is shame, but not exactly a shock, that someone with Peter Hansford's background is proposing to block real progress.

He is essentially lobbying the Government to do nothing to change the inefficient and unprofessional late payment culture in the construction industry. Mr Hansford's is wrong, changing the payment culture in the industry is both easy and a quick win (at least for SMEs and the public). 



"The fact is, that any organisation which cannot manage to check an invoice and make a payment within 30 days is either completely incompetent, or deliberately using it's suppliers as an unapproved short term bank loan."



The problem, I believe, is he represents the views of powerful players who have a vested interest for things not to change. Saying you support fairness, then lobby against achieving it, is a common political game. 



We now live in a modern electronic age, in which even at a personal level, bank to bank transfers can take place in a few seconds. The fact is, that any organisation which cannot manage to check an invoice and make a payment within 30 days is either completely incompetent, or deliberately using it's suppliers as an unapproved short term bank loan. 



Many in the industry, like myself, are trying to lobby the Government - through the Cabinet Office SME team, the Federation of Small Businesses and MPs to show the Government that immediately ending the late payment culture (by punitive action) is critical to the Government's growth agenda and reducing the national debt.



The UK is not alone however, hence the implementation of the Late Payment Directive 2011/7/EU across Europe. 

Voluntary measures don't work. There is always someone at the top with an MBA saying "screw our suppliers to maximise cash in our bank". 

To end on a more positive note, both the Conservative and Liberal parties have a long history of supporting free and fair competition and fair payments. I just hope that Mr Hansford's delay tactics will fail and that the coalition government will have the guts to follow its heart.

Stephen Gibson, director, Innovative UK Engineering Consultancy - Wilsham Consulting

www.wilsham.co.uk

If you would like to contact Jackie Whitelaw about this, or any other story, please email jackie.whitelaw@infrastructure-intelligence.com.