All government’s key suppliers, including Tier One contractors, are among 10,000 companies that have been sent letters warning them to sort out their payments practices or risk being banned from tendering for public sector work until they do.
New rules are coming in from September that mean suppliers who bid for government contracts above £5 million a year will have to prove that they are paying 95% of invoices within 60 days. Otherwise, no government work. Other plans include having strategic suppliers advertise supply chain opportunities valued at over £5 million on the government’s Contracts Finder website.
Cabinet Office minister for implementing the new rules, Oliver Dowden, spelled out the intention, saying: ‘Prompt paying is critical for all companies helping to deliver public services, particularly small businesses which are the backbone of our economy. That’s why, from September, if government contractors are late with supplier payments, they could be prevented from winning public contracts until they clean up their act.’
This is part of the government’s declared policy of having 90% of invoices settled within 60 days, unless there is a dispute over the invoice. Manufacturing a ‘dispute’ however would be the easiest thing in the world to do for a ruthless enough contractor, some of whom are reportedly using every trick in the book to delay the processing of invoices, such as changing the address to which they should be submitted or other ruses to force suppliers to re-invoice. But the direction of change is to be congratulated – although not by Tier One contractors.
Contractors are already supposed to pay suppliers promptly on public sector projects, but few, if any, achieve this consistently. Dowden knows that payment records kept by the government show that no firm of over 250 employees and turnovers of above £36 million currently achieves the 60 day target, let alone 30 days. Dowden has warned that he expects to see progress recorded in companies’ annual reports, many of which are due by July, he noted.
Late payments has for long been a major bugbear of the industry and it is accepted that it damages cash flow to such an extent that companies can go bust while waiting for money that they are entitled to. Tying industry cash flow up for long periods in disputes was identified as such a major problem that construction became the first industry to have its contracts controlled by legislation, with the introduction of statutory adjudication. Could legislation also be needed to force payments to be made in a timely fashion?
The realisation is growing that simply freeing up smaller companies’ cash flow by putting a squeeze on the Tier One level is a solution that will create its own problems. Industry margins are notoriously low. Workloads are fickle at the best of times and work has been in short supply over the last decade of austerity. As a result, many major construction companies are under capitalised, and their own weak cash flow and balance sheets cannot support a prompt payment regime.
Banning them from public sector work will only weaken them further, perhaps fatally. Perhaps tough prompt payments legislation is needed, but government should think first about how Tier One contractors will be able to access the capital required.
Nick Barrett
Editor