Fair and transparent payment practices: The positve impact on the supply chain

Poor procurement and the balance of power between contracting parties can result in some firms becoming more exposed to adversarial contracting and the pressures of low cost tendering. Poor payment practices can also add to the pressure faced by contractors and should never be seen as ‘normal for construction’. Iain McIlwee, CEO of the Finishes and Interior Sector (FIS) looks at payment practices across the fit-out and interiors sector and why fair and transparent payments must be seen as a prerequisite of trust and collaborative partnerships.

Late payments remain a significant challenge for the construction industry, and the impact of the recent economic backdrop is making it worse. The number of insolvencies in the sector is alarming with over 4,000 businesses filing for insolvency in the Tax Year 22/23. This represents a 25% increase from the previous year and a 140% rise compared to 21/22. Furthermore, winding up orders served by builders’ merchants jumped 400% in the past year. Specialist sub-contractors on live projects face potentially heavy losses, uncertainty around whether they will continue to be employed on ongoing jobs, and retention payments being withheld.

Retention payments allow for circumstances where work has not been carried out promptly or correctly. Contracts typically allow for a retained sum throughout the period of construction that reduces on a pre-determined contractual basis. However, misconduct and mismanagement is rife within the industry with subcontractors at the mercy of main contractors withholding payment they are owed. FIS Research conducted by the University of Reading found that 14% of specialist contractors said they never get their money back. It should also not be forgotten that in the liquidation of Carillion, £800m of retention was lost.

New Zealand recently passed The Construction Contracts (Retention Money) Amendment Act which came into force on 5 October 2023. This protects Retentions Monies in the event of insolvency and is a much healthier and simpler way of managing retentions. It strengthens the retention money regime by making it easier for subcontractors to access retention money without a court order, in the event of a head contractor’s insolvency.

In the UK, the FIS has repeatedly highlighted the limitations with current retention reporting requirements that mask some serious underlying problems. Long awaited reform legislation for the new retention reporting requirements is expected to be laid before Parliament in 2024. It is anticipated that qualifying businesses will commence data collation and include in their payment practices and performance reports during 2025.

Going forward
According to industry insiders, current measures to address the late payment problem, including the Prompt Payment Code and Duty to Report, are insufficient. Many in the industry view Project Bank Accounts (PBAs) as a positive step, as they ensure payment is kept separate. PBAs are essentially ring-fenced accounts which see payments made directly and simultaneously by a client to members of the supply chain.

However, concerns remain regarding who will take responsibility for them. Other potential solutions include direct payment from clients and a digital alternative. The government already advocates for the use of PBAs in public sector contracts, but more transparency is required regarding what constitutes “compelling reasons” not to use them.

More emphasis needs to be given in the procurement process to the involvement of subcontractors in front-end construction scheduling and planning. When money flows to the start of a project, then we can phase out the age-old problem of retentions.

A strong, resilient, and sustainable supply chain is in the interests of every stakeholder in the construction sector. As such, there must be a shared commitment to ensuring fair and transparent payment practices. This is particularly critical for preserving the unique skills offered by specialist contractors in the fit-out and interiors sector which is especially important if long-term capability is to be preserved. For these SMEs to survive current challenges and continue providing their high quality specialist services, then fair payment has never been more important if they are to remain trading.

For further information or for any questions please contact the FIS at info(Replace this parenthesis with the @ sign)thefis.org or call 0121-0707-0077.