Construction can’t be sustainable without payment reform

B&ES, retentions, sustainable, project bank account, cash flow
Payments as the key to successful projects and an efficient construction industry — Rob Driscoll.

If the new Government is serious about sustainable, low-carbon construction it must quickly tackle the scourge of late payment and go digital, says Rob Driscoll of the Building Services Engineering & Services Association.

When the coalition Government took office, it pledged to be the ‘greenest government ever’. Five years on that looks like an empty promise. However, all is not lost, and the new administration, of whatever colour, has a great opportunity to stimulate sustainable, low-carbon construction.

The Conservatives are instinctively anti-regulation because they like the free market to drive progress and for businesses to operate unfettered by regulatory burdens. Enforcement of regulations aimed at ‘greening’ construction — Part L of the Building Regulations, air-conditioning inspections and so on — has been feeble, to put it mildly. It is hard to see another coalition, or even a Labour-led Government, changing that to any real extent.

At the recent Ecobuild conference, Conservative MP Peter Lilley said that politicians, of all colours, had ‘enormously exaggerated’ the effects of global warming. The veteran Tory campaigner said the potential cost of implementing the Climate Change Act would far outweigh any financial benefit to the country. That may well be true, but the new Government simply must come at this from another angle.

Low-carbon, sustainable construction is not a burden, but a huge business opportunity for our country. However, it is only happening in pockets of the industry because of supply-chain problems. If our industry was more efficient and if the supply chain more collaborative, the cost of delivering higher-spec buildings would fall and they would be delivered more quickly. This in turn would deliver major cost and operational benefits to the commercial clients who invest in and occupy those buildings, and the UK construction industry would attract greater investment and make more profit.

However, none of this is achievable with a dysfunctional supply chain. You can only deliver sustainable, high-quality buildings if all the project team members are pulling together. For the supply chain to be more collaborative it needs to be financially secure, with everyone able to trust who they are working for. Unfortunately, the lack of visibility of cash-flow and continued and repeated failure of public- and private-sector clients to honour fair-payment pledges is driving SMEs to the brink of collapse— endangering the economic recovery, and threatening to derail the modernisation of the construction process championed by the current, and previous, Governments.

Reforming and modernising the way payment operates in construction through digitisation is crucial because, deprived of a healthy cash flow, the specialist firms that can deliver better buildings and keep carbon reductions on target are struggling to survive — let alone invest in the skills and new technologies they need to meet the Government’s own targets.

It is completely wrong that competent and well qualified contractors, who have invested large sums in their businesses and their employees are not paid on time or able to see the expected cash-flow cycle as the job progresses through a modern online platform for managing public-sector contracts.

This should be absolutely top priority for the new administration — and it is something they can address right on their own doorstep because Government departments are among the worst offenders.

A Freedom of Information request by the Specialist Engineering Contractors’ (SEC) Group revealed that 90% of Government departments routinely withhold payments from contractors. Some even admit to payment ‘retentions’ of 10% of the total contract value, which is double the industry norm and crippling for small contractors.

The Cabinet Office is responsible for the implementation of fair-payment practices across Government departments, but an investigation by the National Audit Office (NAO) revealed that, not only was it failing in that task, it was also a late-payment offender itself. The SEC Group was able to gain information from local authorities, fire and police services, NHS trusts and other public-sector clients and found that only 25% of public bodies in England even monitor their payment record.

Oldham East & Saddleworth MP Debbie Abrahams, who is a leading campaigner against late payment, said the practice was as ‘unethical as tax evasion’.

‘The public sector should be setting an example in how to manage and treat its construction supply chains and should be the foundation on which we build a fair payment culture in this country,’ she added.

Clients remain wedded to retentions because they regard them as security over project problems caused by incompetent suppliers. However, the system is widely abused to the extent that large organisations, including central and local government bodies, routinely use sub-contractors’ cash to fund their own business. That is a scandal.

If the Government seriously wants the industry to modernise in order to meet the targets in its own 2025 Construction Strategy, then it needs to put its own house in order. It can do so by establishing an online digital platform in order to facilitate payment on public-sector works across the construction cycle throughout the supply chain. This would not only speed up the processing of transactions, but on a pioneering level for construction, introduce a visibility of cash-flow never before seen and on which the supply chain can make informed longer-term commercial decisions.

If retentions must be used, that money should be placed ‘in trust’ (i.e. a third-party bank account) so that there is no possibility of payment being withheld unfairly or for extended periods. The SEC Group is working hard with MPs to get this measure approved as it would remove the commercial benefit to clients or main contractors from keeping sub-contractors’ money in their own bank accounts.

The NAO also believes project bank accounts (PBAs), where a separate account is established and payment transparency guaranteed, should be adopted by Government departments to remove the ability of main contractors to abuse the payment process and choke off cash flow to the rest of the supply chain.

Debbie Abrahams has also proposed an amendment to the forthcoming Small Business Bill that companies that continually abuse the payment process should be excluded from public-sector contracts for up to two years. This is the kind of tough sanction needed to sort out this problem. There have been 20 initiatives since 2006 aimed at improving late payment practices, which achieved nothing because they were all voluntary and carried no sanction for offenders.

B&ES president-elect Jim Marner, who works for the major contractor Shepherd Engineering Services, believes the Government’s failure to reform payment threatens to undermine our ability to get modern methods of working, like Building Information Modelling (BIM) off the ground.

‘You can’t carry out major projects if payment is disrupting the supply chain,’ he says. ‘It needs a smarter way of thinking to deliver more collaborative working and, particularly, enable the wider use off-site fabrication [a key technique for improving quality and speeding up delivery].’

In other words, it makes no sense for Government to digitise the construction process but leave the commercial process underpinning construction as analogue; construction needs to catch up with other sectors in its approach to e-commerce.

If you digitise the project payment process you can make the system more transparent. At the moment, even if you agree to terms of 30, 60 or 90 days you don’t get told until two days before payment how much money is going into your account. That is not a recipe for business confidence.

‘You have to get the cash flow under control at the pre-construction phase,’ adds Jim Marner. ‘The Government has recognised that modernisation is essential to cut costs and speed up delivery, so this is an opportunity to push payment reform through.’

Without a healthy cash flow it is increasingly hard for small contractors to invest in the necessary skills and technical training to work with new technologies and deliver higher performing, increasingly complex, buildings.

However, the new administration will almost certainly see a complete and sudden abolition of retentions as a step too far. This archaic system, which is unique to construction, has been with us since the Victorian era after all. So how about moving forwards in a series of measured steps?

The Department for Business, Innovation & Skills (BIS) has said it intends to abolish retentions by 2025, but has not indicated how it intends to get to that ultimate goal. So the new Government could make a positive start by imposing an absolute maximum on retentions of 3% of the payment due. Simultaneously, they should insist that retention cash is placed in trust and that all parties can see where the money is and when it is due to be paid.

Transparency of payment is crucial to instilling the teamwork and stability in the supply chain necessary to raise standards, keep projects on track and improve the commercial performance of the industry. Surely that has to be top of the list for the new Government — whoever they might be.

Rob Driscoll is head of commercial and legal affairs at the Building & Engineering Services Association (B&ES).

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