Late payment charter will see supply chain continue to finance its clients

Nelson Ogunshakin

After giving thought and reflection to reports of the latest Payment Charter due to be unveiled next week, my conclusion is that it will be another failed attempt to address a major flaw in the UK Construction procurement process.

The voluntary charter will create a commitment to pay suppliers within 30 days by January 2018, three years and eight months from now.

The charter will not support the strategic vision and firm leadership required to deal with the root cause of the problem rather than just addressing the symptoms.

What I believe the UK construction industry needs is to adopt a fundamental step change in the procurement system to overcome the culture of reliance on the supply chain to finance clients' projects.

The industry has long argued for fair payment terms of 30 days or lower, the eradication of retention in contracts,  and argued against the imposition of joint and several liability as well as unlimited liability clauses in contracts. Unnecessary and unfair conditions of contract  stifle innovation, increase construction costs and have a major impact on both large and SME supply chain processes across the industry.

"What I believe the UK construction industry needs is to adopt a fundamental step change in the procurement system to overcome the culture of reliance on the supply chain to finance its clients projects."

In 2006 under the Office of Government Commerce [OGC], the industry spent over two years developing and agreeing in principle to adopt an OGC approved Fair Payment Charter. The consultation was led by the then Highways Agency chief executive, Archie Robinson. The essence of the charter was that all public / Government delivery agencies and major supply chain providers would adopt a ‘less than 30 days payment agreement’.  Also that a separate project bank account would be established to speed payment across the supply chain. This was widely celebrated as a break though for the UK construction industry.   

This was subsequently followed by the Institute of Credit Management's Prompt Payment Code, which although not construction specific does include signatories from construction, engineering and manufacturing organisations and is also voluntary. Across all of the sectors there are currently over 1600 signatories at the time of writing, but with no apparent impact.  

As the recession hit the construction sector many of the pledges and promises on both sides of the market were reneged upon.  The industry returned to its traditional bad practices and the smaller players in the market were the ones to suffer from the impact of delayed payments. The practice was particularly prevalent amongst the large first tier supply chain contractors who imposed 90 or 120 days payment clauses with their suppliers.  Surely, this cannot be sustainable and fair to those with less bargaining power in the supply chain?

As we all know, “cash is king in business” and is the life blood of any organisation.  Without secure cash flow in a business – I believe organisations are on a downward spiral. Recent early payment facilities introduced by some to address certainty of payment requires some form of payment or discount by suppliers in order to receive payment.

I have plenty of questions I want clarified by this new charter.

What is the purpose of having a new Government Payment Charter, which is voluntary, with no enforcement mechanism built in?  

Why are we revisiting again when previous charters have not been fully adopted by the industry and government? 

Why does this so called new charter take precedence over contractual arrangements based on best practice? 

Is there a risk that the application of the charter may discriminate between first tier and second tier supply chain providers as to when they should get paid?

Is there also a risk of differentiating between public and private sector clients

In any case, why has the achievement of the original 30 days agreement now moved back to an aspiration for 2018?

I think you may be sensing my frustration.

The newly formed Construction Leadership Group (CLG) has chosen to affect this new charter as one of the outputs of the newly published Construction Industry Strategy. The consultation  process adopted was directed towards the individual professionals rather than the corporate representative bodies who understand the true concerns of the business.

Whilst the motive behind the idea is plausible, one does question the need for rushing the adoption of a new payment charter when previous attempts have never fully been subscribed to.

For me, the real issue is not about who supports and who is against the principle of this “New Payment Charter”. The UK clearly needs to embrace a sustainable procurement culture if the industry is going to become world-class with its own unique competitive advantage.

The challenge for the industry now is how to encourage supply chain providers, be it at first or second or third tier, to continue to finance clients projects without additional financial costs being built in due to the unnecessary protracted payments terms.  These conditions are not in the best interests of either the client or supply chain providers.

We need to consider a move away from endorsing bad practices.  We must change and we, as leaders of the industry, need to champion a positive step change to move forward and not go backwards.

Nelson Ogunshakin is chief executive of the Association for Consultancy & Engineering


Nelson, I'm certain that every contractor, subcontractor and supplier would agree with all you have said, everyone that is except the big 1st Tier MC's who seem to have a monopoly over the major contracts, and are using their supply chain in a despicable way by holding on to monies that rightfully do not belong to them. I can only imagine the amount of interest they earn while their subcontractors suffer from what can only be termed as a form of bullying, i.e. I am in control, if you want the work you will comply, and if you don't like it, clear off, I'll just get someone else. Out of desperation throughout the recession, smaller companies have had no choice but to accept or go out of business. These big players would not be where they are without the countless small companies who earn them their money and they need to remember that. This new Charter is a joke and has simply made a nonsense of all the work that went into it. Things need to change now. Maybe the answer will be that more clients will cut out these large management companies altogether as is already happening, and give the works direct to the thousands of smaller specialist companies who have made the big boys their millions.
Well said Nelson