Late payment has long been an issue in the construction industry, affecting not only smaller businesses and those lower down the supply chain. The 2008 financial crisis exacerbated what was already an existing problem for suppliers. The introduction of the contractual payment provisions in the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) in the mid 1990’s, almost 25 years ago, sought to address, amongst other things, delayed payment, unreasonable payment terms and payment contingent on other events, including pay when paid clauses.
The HGCRA, shored up by amendments to the payment provisions in 2011 and the Prompt Payment Code (the Code), are still in place today. The Code was set up in 2008 by the Chartered Institute of Credit Management on behalf of Government as a voluntary measure to discourage late payment in the UK business culture. However, more is needed to improve late payment practices.
Why is late payment such a problem?
Trade credit is a common part of business practice in the UK. According to the BEIS Longitudinal Small Business Survey 2017: SME employers (May 2018), 50% of SME employers in the UK give their customers trade credit, rising to 84% in the manufacturing sector, 61% in the information and communication sectors and 56% in construction. 66% of SMEs receive trade credit from their suppliers. The BEIS survey also identifies the construction sector as the industry in which late payment is most frequently reported as a problem and a major obstacle to business success.
Three high-level drivers have been recognised as the main factors causing late payment across an economy: the current economic situation; the prevailing business culture; and power imbalances in the supply chain.
These are all reflected in the construction industry which is particularly prone to unfair payment practices due to its subcontracting structure and risk allocation practices. Risk tends to be passed down or along the contracting chain, with potential accumulation of delays at each point. Late payment becomes a form of financing and deferring payment risk. Contractors and suppliers are reliant on each other, yet reluctant to challenge unfair practices for fear of losing business or gaining a reputation as being difficult.
The Prompt Payment Code
Signatories to the Code agree to pay 95% of invoices within 60 days and work towards 30 days as normal practice, as well as committing to other standards such as adopting the Code through their entire supply chain and not retrospectively changing payment terms. The Code also provides a system for dealing with complaints and disputes. It is monitored and enforced by the Prompt Payment Code Compliance Board.
Although more than 2,000 organisations have signed up to the Code as at September 2018, it has fallen short in achieving its objectives. The collapse of Carillion in January 2018, a major government contractor and signatory to the Code, highlighted some of the problem. Carillion was found on collapse to owe about £2bn to suppliers, sub-contractors and other short term creditors. In March 2019, other government suppliers were warned about paying subcontractors on time or they would risk being barred from future public sector work.
In essence, although signatories to the Code make a public commitment to pay on time and pay fairly, certain signatories’ practice does not follow this. There is also little way of regulating performance as payment records are not reported. The Code has increased awareness of late payment as an issue. However, other than through media coverage of signatories who breach the Code and the fear of reputational damage, there is limited redress if signatories are in breach. By the time suppliers challenge a signatory’s status, the damage may have been done.
Removal or suspension from the Code – April 2019
In April 2019, the Chartered Institute of Credit Management (CICM) undertook the first round of publically naming non-compliant signatories to the Code. It reported that seventeen companies were removed or suspended from the Code for non-compliance during the past quarter. The twelve suspended businesses have committed to make changes to meet the standards of the Code and pay suppliers promptly, otherwise they will also be removed. It is expected that more businesses will be removed or suspended as the CICM’s undertakes its second phase of review.
This action follows on from the government’s announcement in November 2018 that from 1 September 2019 any supplier who bids for a government contract above £5 million per annum must demonstrate prompt payment. The expected standard is to pay 95% of invoices in 60 days across all their business, or risk being excluded from the bidding process. The government is leading by example, as well as seeking to penalise poor payment practices.
Further reforms to the Code are being considered, including whether the Small Business Commissioner, who is now part of the Code’s Compliance Board, should have a greater role in its administration. The aim is to make businesses aware of the existence of the Code, increase confidence in it and encourage challenges to a signatory’s status.
In addition to the Code, there are a number of other measures that seek to address the problem of late payment, including:
- the Late Payment of Commercial Debts (Interest) Act 1998 which, among other things, establishes maximum 30 day payment terms for transactions with public authorities and 60 day payment terms between businesses, unless they agree longer terms and this is not grossly unfair to the supplier;
- the Public Contract Regulations 2015 that require many public sector bodies to pay their suppliers within 30 days and to pass this payment term down the supply chain in new public sector contracts;
- The Reporting on Payment Practices and Performance Regulations 2017 that require large companies to bi-annually publish certain information about their practices, policies and performance in relation to paying suppliers. The Prompt Payment Code Compliance Board regularly review this data to ensure that companies are upholding their commitments; and
- recently, the Business Contract Terms (Assignment of Receivables) Regulations 2018 nullify contract provisions which restrict invoice assignment. This took effect from 24 November 2018 and applies to contracts entered into on or after 31 December 2018. It is hoped that these Regulations will assist SME's seeking alternate forms of finance.
Post Carillion, Project Bank Accounts (PBAs) have become an increasingly attractive option to managing payment processes, as well as protecting against upstream insolvency risks. However, they can be relatively expensive to establish and maintain. The set-up and administration costs can be prohibitive on smaller projects. Whilst the use of PBAs is promoted on government projects, there are no plans to make them compulsory on private projects.
Most recently, in June 2019 and following the outcome of the government’s recent consultations, the Department for Business, Energy and Industrial Strategy (BEIS) announced a new policy aimed at protecting smaller businesses from late payments. The measures, which will mainly apply to larger businesses, focus on:
- New powers for the Small Business Commissioner to tackle late payments, including fines and binding payment plans;
- For the first time, accountability of company boards for supply chain payment practices; and
- A new fund encouraging businesses to use technology to simplify invoicing, payment and credit management.
The government also proposes to consult on the merits of increasing the Small Business Commissioner’s powers to compel large businesses to disclose information, and to impose fines and binding payment plans on late-paying large businesses.
Whether large or small, businesses in the UK should be aware of the increasing demands for transparency and consistency in payment practices.