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Osborne chief executive Andy Steele has said the industry “can’t afford” to tackle late payment under the current market climate.

In an interview with Construction News, Mr Steele said a “perfect storm” had formed for many contractors due to the current financial squeeze and pressure from government to improve payment practices. Mr Steele stated that the financial sector has had a “change in appetite” towards construction, pulling away from its exposure to the sector, making access to finance tougher for contractors.

Amid this financial squeeze, government has cracked down on late payment practices. All companies with turnover greater than £36m and 250 employees or more are required to submit their payment practice data to government.

But Mr Steele says that the industry “can’t afford” to improve its payment practices while banks are pulling away from financing construction companies. This is because in order to pay your supply chain earlier would require companies to take out loans to fund this, as historically, contractors have “held the cash to get their business models to work”, he said. This has created an “impossible situation” for a lot of the industry: “Those two dynamics do not work together,” he said.

Although the Osborne boss doesn’t doubt that companies want to pay their supply chain quicker – “and quite rightly, they should be paid quicker” he said – it is not possible to do so at present.

“You can’t just dictate down to companies that you have to suddenly comply with these changes in your payment practices, because the industry can’t afford it,” he said. “It can’t do it in one go.”

Mr Steele said the business model “can’t change overnight” and that there must be “a realistic understanding from government over the state of the construction industry today”.

He added both public and private sector clients need to start paying main contractors earlier.

“If best payment practice is 30 days, then money from the customer has to come earlier than 30 days,” the Osborne chief said.  He added large tier ones with big borrowing requirements who have historic poor payment performance are under a “huge amount of pressure” and could face difficulties.  He added it is in “nobody’s benefit” if these big companies “get into trouble”.

FIS CEO Iain McIlwee responded: “Whilst I don’t like the message, I am glad that Andy put his position out there.  If we break down problems and draw issues out in the open, we can start to make genuine changes – we need more transparency in our supply chain.  We have wrongly used payment as a blunt instrument to manage quality.  Whilst we are now accepting that this cannot and does not work we find ourselves in a position that we are addicted to this extra line of credit and in an uncertain climate finding it difficult to raise alternative funding.  I agree with Andy that it is “nobody’s benefit” if these big companies “get into trouble”, but is also unacceptable for them to limp along on the backs of hardworking subbies – it is also “nobody’s benefit” if these companies fail.  He also makes a good point in that, if payment to the supply chain is to be enacted 30 days, then there needs to be some fat built into this to enable money to flow and be available to pay – i.e. clients need to pay earlier, this warrants more attention.  I am also convinced more can and should be done to underwrite construction, it remains the third largest sector in the UK economy – we could do with more support from the biggest (the finance and banking sector) to manage change and support investment in innovation – this is surely in the national interest!”

 

Source: CN News