Payment delays and withholdings will continue to be headaches for the construction industry thanks to the government’s half-hearted efforts to drive change.
To its credit, the UK government has long recognized the construction industry’s problems with late payments and withholdings. Key policy interventions in 2010, 2014 and 2017 called for addressing prompt payments and zero withholdings.
Earlier this month, the government published details of new information that major contractors will have to publish about their withholdings.
However, the new rules will not come into force until the original deadline for the “zero withholding by 2025” ambition.
This ambition now being achieved seems as likely as the freezing of the Thames.
And exclusive research of Construction news reveals that government departments are not following official guidelines aimed at speeding payments through the supply chain.
So will construction be perpetually stuck in a mire of warm words and paltry actions?
Project bank accounts
In October 2010, the government updated its procurement rules to require project bank accounts (PBAs) for all construction projects awarded by central government departments, their agencies and non-departmental public bodies “unless there are compelling reasons not to do so.”
PBAs see the entire project budget limited by the client, with the main contractor and their supply chain paid directly from the account.
The desired effect is to protect subcontractors from upstream insolvency and eliminate the ability of prime contractors to hang on to money.
“Retention data is quite a strong instrument and there are too many variables that could distort the figures”
Leighton More, Sir Robert McAlpine
In a 2012 guidance on PBA, the government stated that only a “very small number of projects” should not include PBA. In Scotland and Wales, PBAs have been mandatory for devolved government construction projects over £2m (or £5m for civil projects in Scotland) since 2013 and 2017 respectively.
However, this June the UK government scrapped an amendment to the procurement bill that would have made PBAs mandatory on public works projects in England, saying they are “not always appropriate or cost-effective”.
Data obtained by CN reveals that four of the central government departments with the largest construction expenditures are routinely underestimating PBAs.
In response to a freedom of information request for projects worth more than £2m, the Ministry of Justice revealed that only nine (21%) of the 43 construction contracts it has awarded since January 1, 2022 use PBA.
The ministries of defense and health awarded 35 and two construction jobs worth more than £2 million respectively in the same period, neither of which used PBA in a single project.
The Department of Education, for its part, said so CN: “Project bank accounts are not used in our construction contracts for school capital projects.”
Rudi Klein, barrister and former chief executive of the Specialist Engineering Contractors Group, said: “Despite huge opposition from prime contractors to PBAs more than 12 years ago when they were mandated by the Cabinet Office, they have now gained solid traction across the UK.
“It is inexcusable that the Cabinet Office is not implementing [its own] policy as it accepts that PBAs are an effective method of speeding up payments and reducing upward insolvency losses.”
All four government departments refused to offer CN with “compelling reasons” meaning that PBAs are not used.
The Cabinet Office declined to comment on the non-use of PBA, but confirmed that it monitors its use by public contracting authorities.
In the transport sector, National Highways shows what is possible, using PBA in almost 100 per cent of its projects. Lloyd Biddell, the agency’s head of cost intelligence, says: “We don’t think it adds any real cost to projects… the impact on our organization is relatively small, if not negligible.
“The advantages of a PBA are protection in the event of insolvency and prompt payment; these are huge advantages and have proven their worth through Carillion and one or two smaller companies. [going under] since.”
Letter of payment
In 2014, the government launched the Construction Supply Chain Payment Voluntary Charter with the help of the Construction Leadership Council (CLC).
Signatories (such as Laing O’Rourke and Skanska) undertook to make correct and full payments in accordance with their contracts, not to unreasonably withhold payment and to effectively accept and pay for scope variations.
Entrants also expressed a shared “ambition”. […] move to zero withholding by 2025”. However, it is unclear what the letter accomplished before it was quietly withdrawn in January 2022.
Businesses can agree to pay quickly under another voluntary letter: the Quick Payment Code.
The code’s targets are updated occasionally: the latest iteration (2021) calls for companies to pay 95 percent of invoices within 60 days. In theory, companies that do not follow the minimum payment standards will be at a disadvantage in future public procurement.
This is explained by the Department of Business and Commerce (DBT). CN: “The government requires that a supplier’s payment performance be taken into account when awarding contracts, minimizing the risk of late and underpayment issues.”
However, Balfour Beatty, Kier and Galliford Try continued to win public works after being suspended from the code in 2019, with each firm subsequently rejoining following better pay performance.
Mark Reynolds, chief executive of Mace and co-chair of the CLC, says the cards “don’t really work”.
He adds that there is little means of holding signatories to account and that, despite its promises, the government does not take payment performance into account when bidding for contracts.
In 2017, the government introduced a duty to report on payment practices and performance, requiring large companies to publish information on average payment terms and the number of contracts paid late.
But how CN he has reported, the data contains significant flaws, and even companies that admit late payment face no penalties.
In October, the DBT said it would tighten payment reporting regulations, with large companies required to report on “a value metric, so companies and commentators can see the value of invoices, including invoices paid late, and a disputed invoices metric.” He added that large construction companies should report on retention data.
Details followed along with the Autumn Statement, with the government proposing reporting metrics including:
- Contractors’ retention policies, including the standard terms that apply to them, as well as their approach to releasing retention money to suppliers.
- The average number of days required to make retention payments, after practical completion and the end of the contractual-defects-liability period.
- The percentage of withholding payments paid in 30 days or less, between 31 and 60 days, and in 61 days or more.
- The percentage of outstanding retention payments that have not been paid within the agreed payment period.
- The average value of retained earnings per construction contract, as a percentage of the contract value.
Retention payment requirements for qualifying construction contracts will not come into effect until 2025, a year before other changes to the payment reporting regime.
Sir Robert McAlpine, chief financial officer, Leighton More, has doubts about the effectiveness of the measure.
“Retention data is a pretty powerful tool and there are too many variables that could skew the numbers,” he says.
The retention problem
For a long time, prime contractors have been subject to holdbacks to ensure that any problems with subcontractors’ work are fixed.
The problem, like the CN The payment survey shows that small businesses typically wait more than a year to receive full payment for a project, and often lose the final payment in the event of upstream insolvency.
The government has not legislated to restrict withholdings and officially abandoned its goal of eradicating them by 2025 when it withdrew its pay letter from 2014. However, it apparently wants to see them gone.
Main contractors say CN they also want to see behind the withholdings. Reynolds acknowledges that subcontractors have been affected by VAT changes, Covid and high interest rates.
“When subcontractors make a 3 percent profit, they don’t make money for months or years,” he says, echoing views shared by subcontractors at CN paid survey “And even worse, this is the killer, they have no cash. It’s aggravating the [insolvency] problem.”
A 2017 government survey of 506 contractors found that 37 percent of top-tier companies that maintain retentions use them as working capital, while 29 percent use them as part of overhead.
However, the report noted that they are not necessarily increasing cash flow, as customers often keep holdouts at levels.
Spokesmen for Laing O’Rourke and Skanska say their companies still want zero retentions, but hint that customers are partly responsible.
The former says it “depends on all parts of the supply chain, from customer to supplier, adopting a shared vision for a more collaborative payment culture.”
The latter points out that there have been delays in achieving zero retention by 2025 due to the pandemic and issues such as the application of the Building Safety Act.
However, “all customers, prime contractors and subcontractors must be part of the solution to provide a sustainable alternative to cash holding.”
McAlpine’s More says: “It’s not really in the spirit of building a collaborative supply chain to say to the parties at the outset ‘we’ll hang on to some of the payment just in case.'” After all, we need the parties to trust each other”.
So far, some progress has been made.
Following lobbying by the CLC, retention clauses are no longer standard in NEC contracts. Contractual users can choose to use retentions, while other options include performance guarantees or ultimate party guarantees.
CLC is also pushing JCT to remove retention clauses as standard in the new set of contracts, due to be published in 2024, although it remains to be seen whether this will happen as several groups have to sign off on any amendments.
The CLC is also working with the Get It Right Initiative and Cranfield University by collecting contractor data to create a “failure frequency ratio that can be used in efforts to eliminate the need for withholdings.”
The other big possibility for a progressive change in retentions is, of course, a change of government, with the general expectation that the Labor Party will take power in a general election next year or early 2025.
But it remains to be seen whether he will have the zeal to solve the payment problem.
So far, Labor is saying little, with a couple of MPs, including the shadow business minister, refusing to talk to CN on whether he plans to deal with the delinquency.
