We should be pleased with the principles set out by the recently launched supply chain payment charter, but with only nine signatories and a target date for implementation of 2018, it is nowhere near as hard hitting as our sector of the industry had hoped for.
Construction economist Alex Murray reported recently that a third of the assets of some of the UK’s typical principal contractors are financed by trade credit or in other words the supply chain. This cannot be a good business model for any of us.
If recent press reports are to be believed then subcontractors rates are improving, but beware as the economy improves, there is always the temptation to overtrade, putting extreme pressure on cashflow. Employees need to be paid on time and the sub-contractor creditors will not give the same credit terms as the principals enjoy. This means that a busy business can quickly run out of cash, and into trouble.
So, now is absolutely the time to get the industry sorted out. We cannot wait until 2018. But, as well as the government, other clients must take the lead. For example, why are a number of other organisations that have had representation on the Construction Leadership Council (CLC), including Crossrail, Midas Group, Network Rail and Sainsbury’s not also signed up to the fair Payment Charter? Their unwillingness or delay in adding their weight to the Charter does little to reinforce the sectors commitment to seeing fair payment terms established.
The Federation of Piling Specialists (FPS) has been a strong supporter of the NSCC’s Fair Payment Campaign, which not only addresses a number of issues relating to payment, but also promotes the ending of that out-dated bug-bear of retentions. The CLC’s Supply Chain Payment Charter sets 11 fair payment commitments, which includes not withholding cash through the use of retentions, but also sets out many other welcome commitments, such as agreeing to pay suppliers within 45 days (from June 2015) and within 60 days with immediate effect.
Of course, the FPS also wants the principal contractors to be aligned; they should not be funding projects either, unless there is some form of funding initiative. But, this will need resolve and the tier ones are going to have to collectively demand better payment terms up the line.
The time is now. For too long the sub-contractors in the supply chain have had to manage inconsistent payment terms, having monies withheld on retention, and having to deal with the consequences on their cashflow.
The charter could be a pivotal moment for the construction sector, but its success rests solely on the entire sector ultimately agreeing to its terms. Partial engagement will only result in a two-stream payment culture and this could be worse than the status quo. Therefore, all sectors of the construction community need to sign up and sign up now.
It is not just a good idea, but in terms of business ethics it is also the “right” thing to do.
- Martin Blower is the chairman of the Federation of Piling Specialists