Payment performance - where are we now?

In any new role, but particularly one with a national organisation with a long history of supporting a sector, it’s important to understand the priority issues. After just over a week as the CIOB’s CEO, it’s clear that one of the hot topics is payment terms.

There is a deadline coming which should be focussing minds on the issue even more sharply. From 1 September 2019, any supplier who bids for a government contract above £5m per annum will be required to answer questions about their payment practices and performance. The expected standard is to pay 95% of invoices in 60 days. If these standards aren’t met, large construction companies (those with 250 or more employees) could be prevented from getting government contracts.

Construction Manager has covered this issue in depth – and earlier this month reported on the “best and worst firms”.

Where are we now?

According to government data, only four contractors are achieving the target of paying suppliers within 60 days of invoice, and among these only Willmott Dixon have done so in both the most recent and previous reporting periods. I want to congratulate Wilmott Dixon on their adherence to the 95% target. It’s leading by example and many people could well be wondering ‘if they can do it, why can’t others?’

There is data to suggest that construction is the worst-performing sector in terms of companies paying invoices on time. This obviously has a major impact on small businesses and independent contractors – and not just in financial terms. Financial uncertainty causes a huge amount of stress and avoidable anxiety.

Where do we stand?

There’s no doubt that there is a need to improve construction payment times. The CIOB believes that the proposal to block firms from working on public sector contracts if they cannot prove they pay their invoices within 60 days should be taken seriously by parliamentarians and the industry.

However, this proposal cannot be introduced as it currently stands until there are more firms complying with the government’s target – there could be a risk to public sector building projects and programmes if there are too few companies qualifying. We would like to see more time given to firms to improve their performance.

The main factors which lead to delayed payments also need to be examined - cashflow in a sector where profit margins are around 2-3% is critical. Public sector contracts have typically been awarded to firms submitting the lowest bid. While a commitment to getting value for money is understandable, the government should also consider the other factors impacting on our sector, including quality, sustainability, investment in health, safety and wellbeing, among other things.

We submitted a detailed consultation response to government last year when they were seeking views on Retention Payments in the Construction Industry. (Our full response can be found on the CIOB Policy website.) Simply put, the CIOB supports prompt and fair payment in the industry. There is evidence that some payment practices currently prevalent in construction are a barrier to investment, productivity improvements and growth.

We’re also happy to continue working with our partners in the sector to drive change. In our consultation response, we sign-posted towards Build UK’s route map for delivering zero retentions. We are members of Build UK and I believe that one of the most effective ways to improve the situation for the long term is to legislate against retentions. The Build UK route map can be found on their web site.

Blog update as at 22 August 2019:

In the blog above, only published a couple of days ago, I laid out the position that contractors thought they would face from 1 September: “The expected standard is to pay 95% of invoices in 60 days. If these standards aren’t met, large construction companies … could be prevented from getting government contracts.” Given that just four contractors are achieving the target, this is clearly a potential risk to public sector building projects if too few companies are in the running for the work.

The blog goes on to suggest that more time be given to firms to improve their performance. Our Policy Team have talked about proposing a time-limited interim measure along the lines of a sliding scale system, where 75% of invoices paid within the specified period is the requirement for the next 12-18 months, followed by the higher target subsequently.

It has now emerged, just this week, that the Cabinet Office has lowered the 95% to 75% and published an updated guidance note: “How to take account of a supplier’s approach to payment in the procurement of major contracts”. 

Page 3 of the guidance note states:

“With respect to question 5(c), if the bidder has not met the required standard of payment of 95% of all invoices in 60 days in at least one reporting period, they will still pass provided:

·       The bidder has paid between 75% and 95% of all its invoices within 60 days in at least one of the previous two reporting periods … and it demonstrates that it has a compliant action plan to achieve the required standard in future”

This is obviously an extract from the list in the guidance, which also makes it clear that this is a temporary measure, to be “ratcheted up over time until it reaches 95%.” We believe that the Cabinet Office have a 12-month interim period in mind and that only “undisputed” invoices will be into account when assessing payment records.

This is a move that we welcome and is an opportunity to put right the issues around payment practices that impact on cashflow, investment, productivity improvements and growth, moving to prompt and fair payments across the industry.