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Crack down on late payments and a letter from the Construction Minister

by Iain McIlwee | 26 Sep, 2024 | Transformation

The government has, this week, unveiled new measures to support small businesses and the self-employed by tackling “the scourge of late payments”. New legislation being brought in the coming weeks will require all large businesses to include payment reporting in their annual reports – putting the onus on them to provide clarity in their annual reports about how they treat small firms. This will mean company boards and international investors will be able to see how firms are operating. Enforcement will also be stepped up on the existing late payment performance reporting regulations which require large companies to report their payment performance twice yearly.

The announcement by Business Secretary John Reynolds also sets down an intention to consult on tough new laws which will hold larger firms to account and get cash flowing back into businesses – this is seen as key to supporting growth.

How are requirements changing?

Under current laws, responsible directors at non-compliant companies who don’t report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records.

A new Fair Payment Code will replace the old Prompt Payment Code, and will be open to signatories this autumn. Businesses will need to prove they have met good payment standards before being awarded official code status.

This will be designed to push businesses to pay faster more often, to be awarded either gold, silver or bronze status. The Code will also shine a light on those responsible businesses doing the right thing by their suppliers and small firms.

It comes as part of our wider work to support SMEs to help go for growth with reform to business rates, getting more small firms exporting and our new industrial strategy.

A consultation which will be launched in the coming months, which will also consider a range of further policy measures that could help address poor payment practices. These new proposals, subject to consultation, will be bought forward on audit and audit committees, in order to help rebuild small businesses’ trust that they will be paid on time and to deliver on Labour’s manifesto commitment to tackle late payments.

Prime Minister Keir Starmer said:

We’re determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.

We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. Late payments cost businesses tens of thousands of pounds and is one of the biggest reasons businesses collapse.

After years of delay, we’re bringing forward measures that small businesses have long been calling for to tackle late payments once and for all.

Business Secretary Jonathan Reynolds said:

Late payments are simply unacceptable and this government is determined to level the playing field for small business. When the cashflow runs dry, small firms go under which is why we need to hold larger business to account with their payment practices and foster an environment that supports growth and jobs.

Slashing trade barriers, reforming business rates, getting more SMEs exporting – this government is committed to small firms. We know there’s a lot more to be done, but today we are calling time on late payers once and for all.

New research published by the Department for Business and Trade has found payment problems multiply the further down the supply chain you go. With delays to payments increasing with each business along a supply chain, this results in smaller businesses generally experiencing more issues with late invoices than larger firms.

These new findings underpin the need to move quickly to crack down on late payments. The research also found that there was a clear imbalance between big and small firms, and that administrative errors are a major factor in creating slow payments with 24% of firms saying that invoices being incorrectly handled added to delays.

The government will work closely with industry to discuss what further measures can be considered to crack down on late payments while ensuring we strike the right balance and avoid excessive burdens on businesses.

The Small Business Commissioner, Liz Barclay, said:

I am delighted to announce a new Fair Payment Code will be launched this autumn. The new code will reward businesses that treat their suppliers fairly and pay them quickly. It will also include an ambitious new Gold Award which aims to make 30-day payments the new standard for which businesses can aim.

We need sustainable, resilient businesses at all levels of the supply chains, to achieve the growth the economy needs. That means paying everyone from the largest supplier to the sole trader quicker, so they have the confidence to invest, improve productivity and grow. Fair payment terms and on time payments are the key.

FIS Reaction

FIS has welcomed the announcements. The organisation had already been in touch to express concern that legislation due to be laid before Parliament before the snap election was called in June had been delayed. In their letter to Construcion Minister Sarah JOnes MP, FIS made the following statement:

<in construction> Large firms help enable projects, but it is the supply chain of SMEs who will need to find and invest in the 66% growth in the workforce we will need to deliver the homes that Labour is expecting. These SMEs find themselves at the mercy of inept and at times immoral procurement practices, contractual processes that leave them picking up the full risk of mistakes and omissions by others and credit and payment terms that make it almost impossible to plan and invest effectively as businesses.

SMEs are constantly paid late with appalling credit terms that often see them exposed to 90 days + of cost on a job before they receive a penny. With little protection available from insurance, this is offset by trade and charge card credit on materials. These SMEs have no protection from upstream failure and a raft of these in recent months has rocked our supply chain. Tracking payment practices (value not volume) is not enough (we need to look at how the supply chain is protected with bonds and project bank accounts), but a worsening payment trend can give the supply chain vital warning of a looming failure.”.

In her response, the Minister provided some reassurance that the new Government do understand the severity of the situation.

The Government is committed to creating a better business environment for small businesses. This includes taking action on late payments, to ensure small businesses and the self-employed are paid on time, and to increase transparency in relation to payment performance. Whilst the draft Statutory Instrument introduced earlier this year had to be withdrawn, the Government is fully aware of the importance of these changes to the payment reporting requirements to subcontractors in the construction sector. Therefore, it intends to reintroduce this legislation at the earliest opportunity. The legislation is now expected to be re-laid before Parliament in 2024, enabling commencement in 2025.

You can see a full copy of the Minister’s letter (in which she also expresses gratitude for the proposals set down in FIS Manifesto) here here.

Read FIS Manifesto for the new Government: A Blueprint for a better Construction here

FIS Welcomes Government and Calls for a New Dawn for Construction Too

by Iain McIlwee | 5 Jul, 2024 | Main News Feed, Transformation

FIS today congratulated the new UK Prime Minister Sir Kier Starmer and his colleagues on their election success as Labour forms the new Government.

FIS CEO Iain McIlwee noted that “A new Dawn for the UK, means it is essential to deliver a new Dawn for Construction. The UK Construction Industry is at the beating heart of the country, enabling all other parts of the society and the economy to function and succeed. The construction sector is worth 9% of GDP to the and employs over 2.5 million people. But it is more than that, it provides our homes and infrastructure, it shapes our cities, preserves our heritage, provides our shelter and shapes our lives – great buildings are at the heart of a great nation.”

Two key areas of important focus for the new Government in their hundred day plan are:

Firstly Government as a procurer has perennially missed the opportunity to harness the potential of construction to support socio-economic development. Best value procurement is delivered by following principles of the Construction Playbook, but the Playbook is routinely ignored. Investment in the Value Toolkit took this a stage further, but this has never been realised. Section 106 and equivalent procurement interventions needs an urgent rethink to align to the Playbook and ensure value outcomes are measured on a National Level – more devolution is coming, but it should enhance not replace a national strategy.

The reality of building more homes (more anything) is we need more people. We have spent a generation building an industry around immigration, so this reform is going to take time and the infrastructure is not there (in our sector we need to double the best we did since 1974 to maintain the workforce we need).

Government needs to stop quoting International Benchmarks about arbitrary educational levels and “future skills” and look at what we need now. The landscape for L2 and L3 Apprenticeships has been decimated. The average apprentice is now over 25 and studying for a higher or advanced level apprenticeship. Only one in five apprenticeships is in a shortage occupation.

We need 1 in 10 people to choose to work in construction and we need them more work ready than they are now. The role of the education system is to get people work ready and it then becomes the responsibility of the employer to turn work ready to competent and develop them. Our reality is that kids leave school (and often college) nowhere near work ready and conditioned to think of construction as a last resort, not recognising we are the bedrock of all social and economic evolution. The dialogue in schools about our industry needs to change, it is a well paid and essential sector. This was evidenced in the chaos of Covid when Government failed to deem construction essential workers, but still needed the “essential work” done.

In the meantime, we need an approach to migration and the Shortage Occupation list to be an agile stop gap solution.

We also caution Labour to consider carefully their plan to be tough on contingent workers. Government needs to be mindful of a quote that jumps out for me from the Reading Report:

“To invest in a directly employed workforce would render many firms uncompetitive given the limited focus on genuine and enduring collaborative relationships that procurement practices allow. The consequential reliance on contingent forms of labour is an issue of commercial reality rather than preference but has a detrimental impact on the training culture.”

Finally the Building Safety Act is a force for good, but there are some big gaps. A key to tightening is to ensure that a Design Responsibility Matrix in included in the list of regulated documents for the Building Safety Act, ensuring that this vital mechanism to make system based decisions based on the right advice at the right time is in place.

Read FIS Manifesto for the new Government: A Blueprint for a better Construction here

New procurement rules demand faster payment on major contracts

by Iain McIlwee | 2 Apr, 2024 | Contractual and Legal, Transformation

A new stricter procurement regime is being introduced to support the Government’s 2019 Manifesto commitment to ‘..support start-ups and small businesses via government procurement, and commit to paying them on time…. <and> clamp down on late payment more broadly…’.

The Public Procurement Notice PPN 10/23 comes into force on the 1st April and demands historic payment performance is taken into account when awarding new Central Government contracts with a value in excess of £5 million per annum.

Contracting authorities must verify that the successful bidder meets the selection criterion prior to award of the contract or appointment to a framework agreement or dynamic purchasing system. The criterion is based on:

Whether the bidder has paid its suppliers in accordance with the contractual terms that it applies to its supply chain; and
Whether, overall, the bidder has paid its suppliers promptly by:
- paying at least 95% (at least 90% if an action plan is provided) of invoices within 60 days, which is considered an appropriate measure of overall payment promptness, and;
- meeting the average payment days threshold of at least 55 days for all invoices.

Reporting on this requirement will take into account a twelve month period and the bidder must demonstrate that they meet the required standard in at least one of the two previous six month periods – intercompany payments should not be included.

Where the bidder has reported payment data every six months in accordance with the Reporting on Payment Practices and Performance Regulations 2017, the two most recent reports can be submitted. If the bidder has recent data for the previous three or more months which has not yet been reported under the regulations, then this can also be submitted as a reporting period.

Where bidders are not required to publish their data in accordance with the regulations, they should still submit the previous twelve months’ worth of available data in two (six month) periods in line with the Department for Business and Trade Guidance to Reporting Payment Practices and Performance.

The criteria for applying the rules is summarised as:

Bidder pays ≥95% of all supply chain invoices in 60 days and the bidders average payment days are also ≤55. Both metrics are hit concurrently in at least one of the previous two six month reporting periods.	Bidder meets the required standard.	Pass
Bidder pays ≥90% < 95% of all supply chain invoices in 60 days and the bidder’s average payment days are also ≤55. Both metrics are hit concurrently in at least one of the previous two six month reporting periods.	Bidder demonstrates action plan that includes (as a minimum) the following: 1. Identification of the primary causes of failure to pay: (a.) 95% of all supply chain invoices within 60 days; and (b) (if relevant) all supply chain invoices within agreed terms. 2. Actions to address each of these causes. 3. Regular reporting on progress to the bidder’s audit committee (or equivalent). 4. Plan signed off by a director. 5. Plan published on its website. (This can be a shorter, summary plan)	Pass
Bidder pays ≥90% < 95% of all supply chain invoices in 60 days and the bidder’s average payment days are also ≤55. Both metrics are hit concurrently in at least one of the previous two six month reporting periods.	No action plan or action plan does not include all of the above features.	Fail
Bidder pays <90% of all supply chain invoices in 60 days in both of the previous six month reporting periods after removing intercompany payments (if relevant).	Bidder’s payment performance falls substantially below the required standard.	Fail
Bidder’s average payment days are >55 in both of the previous six month reporting periods after removing intercompany payments (if relevant).

Exemptions should only be considered:

where the market for a contract of this type is distorted/narrowed/struggling to such a significant extent that delivery of public services is likely put at risk, or value for money is likely to be severely compromised;
where there is a civil emergency.

FIS CEO Iain McIlwee commented:

“Whilst this another positive step, we are still talking about lengthy payment periods in an industry where up-front costs have increased substantially in recent years. It is also narrow in application, the requirement to comply with this notice only binds Central Government Departments, their Executive Agencies and Non Departmental Public Bodies where the contract value exceeds £5 million. It does not apply to NHS trusts, local or devolved authorities and there is also a fair bit of wiggle room provided in the exemptions. All this means in real terms the impact will limited for the vast majority of those working in the finishes and interiors sector. That said it is further recognition of the importance of an issue which remains a cancer at the core of construction and our hope is that as procuring authorities look to the new Regulatory Requirements and concerns about the resilience of the supply chain that they look to exceed the expectation set down in this PPN.

With increased Government support it is more important than ever that we call-out poor practice. If you have payment concerns FIS is able to take these foward anonymously both directly and working with the Small Business Commission (who has sanctions via the Prompt Payment Code). Through FIS you also have access to QS, Legal and specialist credit checking services that can help to expedite payment – nothing changes if we do or say nothing and we will always look to act in your best interests”.

A full copy of the PPN is available here

Creating a productive environment for UK Construction

by Clair Mooney | 28 Sep, 2023 | Building Safety Act, Transformation

Building better: CLC announces plan to boost industry productivity by 25%.

The Construction Leadership Council has today published a new report exploring the potential for the UK industry to transform its productivity, identifying three areas where billions of pounds of savings could be made, or additional value generated for the UK economy.

The analysis explores why average productivity per worker in construction lags 13.5% behind the wider economy and suggests that the introduction of a number of measures – many of them already in the process of delivery – could boost productivity by up to 25%.

For the first time, the report includes a detailed breakdown, issue by issue, of the potential benefits of boosting construction productivity; demonstrating the urgency of the issue and the scale of opportunity on offer if the challenges can be addressed.

The three key focus areas identified by the report are:

Better preparation: creating a productive environment to develop and deliver projects; through reforming the planning process for housing and major infrastructure projects; showing consistent leadership in project scope, creating more effective delivery teams, improving supply chain relationships and more collaborative working during the design process; delivering a potential 17% productivity boost and £30bn in annual value added.
Better building: delivering construction more productively; through maximising the use of MMC, supporting workers in the industry to re-skill and extending their careers; and reducing re-work through the elimination of errors; delivering a potential 7% productivity boost and £12.7bn in annual value added.
Better business: supporting our industry to do business more productively; through supporting digital investment for SMEs, better utilisation of capital and improved data on productivity at a sector level; delivering a potential 2% productivity boost and £2.8bn in annual value added.

Richard Robinson, Deputy Chair of the Construction Leadership Council and Chief Executive Officer, UK & Europe at AtkinsRéalis, said:
“Improving the construction industry’s productivity offers the UK one of our largest economic opportunities. If we can build faster, at a reduced cost, we can spur growth and job creation across the UK – delivering the places and infrastructure our communities want and our economy needs without delay.
“At a time when construction costs and the complexities of planning policy are rightly under scrutiny within the UK, this latest report from the CLC lays out the scale of the opportunity and sets out a roadmap to partner with Government to help us realise it. This isn’t just something that benefits our industry – it’s something that could be transformative for the entire country.”

The report includes a series of recommendations and measures for industry and government to follow, many of which are built on already existing programmes of work; highlights of these include:

Reform Planning, Allow industry to pay increased planning fees in returned for guaranteed standards of performance, learning from the best of the current planning authorities who already deliver efficiently and digitally
Showing consistent leadership in infrastructure planning, Adopt the proposed National Infrastructure Commission recommendations around accelerating the planning process for Nationally Significant Infrastructure Projects.
Supply chain development, work with the industry to bring about widespread fair and balanced commercial terms and payment practices.
Explore licensing domestic builder, gather evidence to understand the link between licensing domestic builders to enhance quality and productivity and if sufficient, introduce licensing.
Set out a clear policy and regulatory roadmap to accelerate domestic retrofit across UK housing stock.

The measures in the report will be built into the existing Construction Leadership Council delivery programmes.

FIS calls for payment and retention overhaul

by Iain McIlwee | 28 Apr, 2023 | Transformation

FIS had today responded to the Amendments to the Payment Practices and Performance Regulations consultaton calling for an overhaul that will better support SMEs in the sector.

The FIS response draws on recent research conducted by the University of Reading into procurement, contractual and payment practices in the sector. It challenges headlines indicating that payment in construction was improving, on the basis of flawed data that fails to measure the value of invoices paid and is opened to being gamed. As it stands companies only need to report on the percentage of invoices paid, but does not measure value. Whilst the guidance does make clear that invoice in construction should mean application, this is not regulated and there is little to no enforcement of how companies are reporting. This misleading dataset masks a cancer at the core of construction that is killing businesses and ruining lives.

In the response FIS makes it clear that whilst metrics on the average percentage of volume of payments made are useful but fail to give us a true picture of payment performance. As it stands efficient payment of small invoices for e.g. business facilities or stationary could mask differing practices within the construction sector, typified by larger payments. The FIS also recommends that Duty to Report obligations should be incorporated into annual Audit requirements to ensure that there is third party scrutiny of auditing practices.

The FIS is also calling for a clampdown on retention practices. FIS Research dentifies 33% of main contractors always secure retention, compared to 14% of specialists. This concern here is that a significant proportion of retention that should cascade through the supply chain is actually realised as profit. FIS continue to advocate for the ultimate abolition of retention, but in the interim, to ensure that retentions are protected, associated only with the work packages undertaken and AUTOMATICALLY RELEASED based on a defined date (rather than abstract event). This should be Regulated and monitored to prevent nefarious practices.

In a seperate consulation the FIS has applauded the efforts of the Small Business Commissioner recommending that the Office is strengthened, responsibility in the construction sector is extended and that the office is given more resource and greater powers to support SMEs in the supply chain.

You can read the full FIS Payment and Retentions Submission 2023 here and response to the Small Business Commissioners Consultation here.

The consultation closes at 11:45pm tonight and FIS has also prepared a template response to encourage members to feed their views in here.

Vital work to improve payment in construction – we need your help

by Iain McIlwee | 31 Mar, 2023 | Transformation

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 responsiblepaymentculture@beis.gov.uk (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.

Iain McIlwee
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.