In March FIS attended a round table with CLC and Government officials to look into payment practices, retention and support available through regulation via the Duty to Report. I think there is a desire from Government to beef things up a bit to support SMEs, but we need to ensure that they see votes in change and that small businesses feel strongly about it – so to get change over the line we need your help. We will, but we also need you to respond to the consultation.
What is the aim in all this?
Recent headlines that payment practices in construction are improving are, at best, misleading. Our own research with the University of Reading (shown in the chart at the top of this page) tells us that, for most in our sector, it is no better and, for nearly a quarter of specialists, it is worsening. The improvement headlines ring particularly hollow when we see the human impact of poor practice and you know and care for the people that our QS helpine has been working with – it is not just cashflow and the cost of money that concerns us, the stress and human toil of poor payment is literally sickening.
Where the market fails to correct we need regulation to drive better behaviour. Effective Regulation needs three things, a clear and proportionate set of rules and scope, an mechanism to measure and impactful enforcement.
Why does official data suggest it is getting better, but I am not seeing any (positive) change?
The old addage… lies, damned lies and statistics comes to play here. The headlines are based on information extracted from the Duty to Report. The concept of the Duty to Report is it exposes payment practices – it compells larger businesses (those that satisfy two of the following £36 million in turnover, £18 million on its balance sheet and 250 employees) to formally report on payment times against an agrreed criteria. This means Government can make procurement decisions based on it, have a formal measure to support initiative like the Prompt Payment Code and equally SMEs can check theoretically check a company’s payment history (here) to help decide if you want to work with them. It is a good concept in that it highlights a problem, but the issue is that it is poorly delivered.
The underlying problem is that companies only report on volume of invoices, not value. Ten tiny invoices (for e.g. stationary) can drown out one huge invoice for construction. She system can be gamed by selecting what invoices to pay early to mask that you are paying the big ones late. Thus you can still continue to use the supply chain as a free line of credit and still look good on paper!
The other big issue for construction is that it measures invoice payment, but in the complex world of applications, valuations, pay less notices and certification the invoice is not . The guidance is actually fairly cut and dry:
- For construction contracts in scope of the Housing Grants, Construction and Regeneration Act 1996 or the Construction Contracts (Northern Ireland) Order 1996, businesses must use the earliest point at which they have notice of an amount for payment.
- This would generally be the date they receive an application for payment or, in cases where there is no application for payment, the date on which they receive a payment notice (or default payment notice) or on which they issue a payment notice – whichever is earliest. Day 1 of the time taken to pay will be the day after the day on which the business has this notice.
but, guidance is not regulation and frankly there are no meaningful checks and balances on how people are reporting. In fact in our digging, it was identified that there have been only 18 investigations and no prosecutions. Without proper checks and balances and strong enforcement, regulation is about as useful as a chocolate teapot!
Aren’t we supposed to be getting rid of retention by 2025?
The CLC roadmap to zero retentions does say that they should be phased out no later than 2025, but like so many ‘Roadmaps’ we seem to have lost the road!! I remain concerned that retention debate often gets derailed by trying to solve two problems at once. For me there are two distinct parts to this debate:
1. the underlying concept of retention – how we work, as a sector, manage trust and quality with clients to evolve away from retention and ultimately how our Standard form Contracts support this evolution.
2. how they are fairly and consistently deployed within the supply chain – a key conclusion from our research is that they aren’t and the further down the supply chain, the less likely you are to actually get your retention.
I know it is more nuanced than that in terms of why and whether people have claimed, but for whatever reason the retention isn’t cascading smoothly (certainly not automatically). If you think of certain parts of our market, the low margin means that the tier one is making around 3% profit on average – the value of retention effectively sit at their approximate profit. Whilst there is a cash concern that more might be held against than they hold, the motivation for the less scrupulous in the supply chain, the difference between the 33% of main contractors and 14% of specialists always securing retention is about 19% of profit. For this reason FIS can continue to advocate for the ultimate abolition of retention, but in the interim, to ensure that retentions are protected and AUTOMATICALLY RELEASED based on a defined date (rather than abstract event).
So what do we need you to do?
The purpose of this post is not to rant about things we all know, but to emphasise that FIS reserach is helping to inform a debate which is happening and there does now seem geniune interest from Government in addressing some of these issues and appreciation that continued nefarious practices in construction undermine the cultural changes that they want to see. This is where you come in…
Full details of the Payment Practices and Performance Regulations 2017 consultation here
You can respond via the webiste or by copying and adapting (where you feel necessary) below in an email to the consultation questions to firstname.lastname@example.org (by 11.45pm 28th April 2023).
We have with colleagues representing specialists set down a template response that you can be downloaded below, but remember this is your response so do feel free to edit/ammend and add any personal comments or experience to help support understanding and change.
You can download the FIS template response here
Please do send us your response so we can factor in any additional points to the core FIS input on this. Thanks for your support – together we are stronger.
CEO, Finishes and Interiors Sector
PS Through this process we are always looking for feedback on our Procurement Research recently completed with the University of Reading that may help you with your response.
PPS For support in managing your contractual responsibility, including the new Best Practice Guide that FIS has helped develop with the CICV in Scotland and standard Terms and Conditions launched in 2023.