Grabbing the payment culture bull by the horns

Rudi Klein is a barrister and director at KleinLegal

Recent measures on improving payment practices have failed, yet again, to measure up to the extent of abuse in the industry. We all know about the devastating impact that such abuse has had on businesses over many years. It has sapped the industry’s ability to make the investment needed in skills and technology to improve productivity and thereby deliver significant growth.

Much has been made of the recent amendments to the payment reporting regulations. These were amended this year to require the inclusion of a value metric; the reporting now has to include the total value of payments not made within the contract terms.

“Only about half of large companies are actually reporting, even though it is a criminal offence not to do so”

Contractual provisions on retention must now be reported, including whether a contractor is withholding the same amount of retention against its supply chain as is being withheld from the contractor. The time taken to release retentions should be reported alongside the payment reporting. But who will check this? Probably no one.

This is the main problem ─ a lack of enforcement. Only about half of large companies are actually reporting, even though it is a criminal offence not to do so. To date there have been no prosecutions, but the Department for Business and Trade (DBT) is now starting to stir. Non-reporting firms will receive three reminders, the last one being a warning of impending prosecution.

But what about inaccurate reporting? Governments have continued to ignore the fact that payment malpractice is the product of the prevalent business models in the industry, which are designed solely to enhance profitability from cash withheld over long periods from supply chains which deliver the bulk of value.

So let’s get real. Initiatives that do not disrupt such business models are always bound to fail. Payment cycles always become longer and longer as cash moves from one pocket to another. This government must now legislate once and for all to remedy this disease of payment abuse which has afflicted the industry over many years.

The DBT consulted on improving the Construction Act some eight years ago but, as as usual with this department, it failed to act. Pay when paid must be completely abolished. The payment notification process must be streamlined and pay-less notices must be issued at least 10 business days prior to the final date for payment. Furthermore, there must be a statutory right to use existing fixed-fee adjudication schemes so that small claims can be pursued without fear of incurring large legal bills.

Project bank accounts

Project bank accounts (PBAs) have been a success story across the UK. The more successful they have become, the more they have attracted opposition. It is gratifying that digital enhancements to the PBA process (such as making them easier to set up) have been introduced and are now being tested on some current projects. We must legislate to mandate the use of PBAs across construction, which the Australian state of Queensland did some three years ago.

The UK Government has just closed a consultation on banning retentions. The only jurisdiction to do this was the US state of New Mexico in 2007. The legislation is now a dead duck because the lawyers have found myriad ways around it. Avoidance attempts and consequent disputes are more likely when something is banned. There has been much less resistance in those jurisdictions (such as some states in Europe, the US and Australia) that have legislation ring-fencing retention monies.

Unless we are prepared to grab the the bull by the horns and legislate for this, other measures will simply amount to tinkering around the edges. Trade associations representing SMEs and small firms now need to up their game if we are to make a difference that will endure in order to secure a sustainable future for the industry.