Thursday, January 5, 2017

Farmer report makes the case for digital payment

Rob Driscoll, BESA Director of Legal and Commercial

The current industrial revolution caused by the disruptive nature of integrated technology is not a new subject to BESA, but it is interesting that in the last six months construction as an immature market in this area seems to be emerging from the place of denial into the epiphany.

Inevitably this is leading to the next big challenge – CHOICE! – how does any organisation make the right choices when stepping into the digital age and wholesale investing its money, infrastructure, processes and people in digital products which all profess to be better than the rest and perform multiple functions quicker and slicker than their competitors. Unfortunately, we will be hitting that stage of the revolution whereby the market becomes saturated and crowded with competition before it matures and the leading products emerge winning market share based on due to quality, reliability, security and functionality.

Since 2014 BESA has led industry innovation in the area of digital business – article – as the discussion gathered momentum thought leaders have invited BESA’s Director of Legal & Commercial Rob Driscoll (newly appointed adviser to the Crown on SME Business) to help visualise and frame the discussions as to how risk, waste, productivity and commercial stability can be improved through automation – this has included to alliances with both CIOB and Construction Excellence – click here for more info.

Most recently, BESA directly fed into the intellectual input manifesting in Mark Farmer’s recent report for the Construction Leadership Council – challenging the industry to “modernise or die” – has strengthened the case for a government-backed digital payment platform.

This could also support Chancellor Philip Hammond’s ambition to reinvigorate productivity as set out in his Autumn Statement which BESA also fed into.

Labour and skills shortages, along with low margins, delays and budget shortcomings, are dragging construction down – and much of the blame can be laid at the door of late payment and its catastrophic impact on cash flow.

Small and micro businesses are the lifeblood of construction.  According to Government, ninety percent of the industry’s 280,000 SMEs are responsible for over 60% of total project value. They are simply vital to the UK’s overall economic growth. Yet they are hamstrung by an unfair payment system that often starves them of vital cash flow and stifles their ability to invest in growing and improving their businesses and employees.

BESA has been instrumental in both helping Government create, build, test and implement the foundation stones for a fairer payment architecture within the Construction Industry, but digital remains the catalyst for change. Summary of each of these Government led innovative initiatives is set out and linked below:

Construction Act Payment

Construction Supply Chain Payment

Project Bank Accounts

JCT Standard Building Contracts

Late Payment of Commercial Debts Interest Act

Mystery Shopper Scheme

Payment Performance Reporting Requirements

Payment Schedule

Prompt Payment Code

Public Contracts Regs 30 Day Payment Rule

Retentions 

Small Business Commissioner

Supply Chain Finance

This has a direct impact on business models, R&D, quality, training/skills and, by extension, our ability to deliver the UK’s industrial strategy to ensure a post-Brexit UK economy and society remains fit and strong in a globalised competitive economy.

Again Government’s own figure confirm small businesses involved in construction incur £180m in debt interest every year as a result of late payments and spend an average of 130 hours chasing money due to them – at a cost of £1,500 per company, according to Constructing Excellence (CE).

The average wait for payment is now over 15 weeks and has increased by 22% since the financial crash of 2008. In the same period, bank lending to construction supply chain firms fell by 38% compared with 5% across the rest of the economy.

MINEFIELD

CE’s ‘Payments Minefield’ report (pre-dating the Farmer review), which was supported by the Building Engineering Services Association (BESA) and the Electrical Contractors’ Association (ECA), says this problem has blighted the industry for decades and has resulted in almost 20 separate voluntary payment ‘initiatives’ (charters, codes, regulations) since 2004 – that have made precious little difference.

Late payment is a “primary or major factor” in 20% of corporate insolvencies, according to the report, which added that the money lost as a result of late and delayed payment had restricted the ability of supply chain members to invest in training, skills, and R&D. As a result, productivity is harmed and business prosperity has been “severely stunted”.

An integrated payment system that is totally digitally transparent, more efficient and allows everyone to work in an environment of greater trust and certainty is essential. It is a crucial element of Farmer’s conclusion that a ‘digital revolution’ is needed to modernise construction involving the harnessing of multiple platforms.

He believes that Building Information Modelling/Management (BIM) representing the disruptive effect of the current technology driven industrial revolution should lead to a change of mindset whereby project teams coordinate properly and design projects for manufacture and assembly– rather than the current fragmented system that creates all sorts of problems on site. In truth he is simply describing the positive, but disruptive effect that integrated technology has on existing markets such as construction.

This requires better collaboration and an end to the adversarial conditions that disrupt supply chains.

Digital systems can also improve predictability and cost certainty, according to Farmer. This naturally feeds into modernisation of the antiquated methods many Tier One contractors use to deliberately delay payment to sub-contractors to fund their own cash flow. It is harder for them to do that in a properly coordinated project framework with transparency at its heart.

The construction industry remains amazingly labour-intensive despite an improved, more automated model being available for years. Our clients are building their businesses on digital networks, which gives them greater transparency, client engagement, and new ways of designing, marketing, and delivering products and services – they are, therefore, puzzled that their construction suppliers seem incapable of doing the same.

In many aspects, this Luddism is deliberate because some larger firms use their suppliers as de facto bankers – ‘borrowing’ their money without permission in order to fund their projects.  The government has an opportunity to impose change by introducing a pan-industry digital platform that makes payment transparency an integral part of the sector’s modernisation.

The ultra-slim margins ‘enjoyed’ by most construction firms could be dramatically improved by adopting these digital efficiencies – simultaneously reducing the motivation to cheat your own suppliers.

SMART

The construction industry is now expected to deliver smart grids, smart energy, smart homes, and smart cities. The government has driven the use of BIM on its construction projects and needs the industry to step up and meet expectations of new design models using new construction materials and techniques.

For leaders and innovators in the construction market, digital transformation from human to automated systems can enable lower cost, higher efficiency, increased productivity and ultimately more profit.  It can also transform employment models; creating a wider pay and skills divide with a strong demand at the high and low ends, but a hollowing out of the middle.

This could have real overhead benefits for contractors – and address the skills shortage by allowing them to deploy people where they are best used while allowing digital systems to fill in some of the gaps.

In other sectors with stronger and more cohesive supply chains, automation has led the transformation of entire systems of production, management, and governance along the road to the Internet of Things. Construction is not as different as many would have us believe – it is not the nature of our work that constrains greater digitisation, but the ‘culture’ that has grown up within non-collaborative supply chains.

The arrival of the Digital Age gives us the opportunity to sweep that culture away. The effect of disruption is predicted to be that those who fail to collaborate and interact in a digital working environment are left by the wayside – and cash starts flowing through the supply chain to everyone’s benefit.

Construction surely can’t hold back the march of digital forever. This is, after all, the age of Amazon, Google et al and, in almost every other area of business, digital payment is the norm. Let’s embrace it and get cash flowing through the supply chain to everyone’s benefit – most noticeably building users and occupiers.

PRODUCT INNOVATION

To be successful in today’s competitive economic environment organisations must be able to minimise the time it takes to leverage enterprise information assets in order to streamline business-critical processes.

Yet many organisations do not have the means to access collective information quickly and effectively. According to Gartner, Inc., employees spend between 30 and 40 percent of their time creating, searching for, retrieving, repurposing and organising documents — time wasted. In document-intensive industries, this seriously impacts the decision-making process, hindering organisational agility and limiting competitive advantage.

To give you an outline of solutions available in this area:

• Emerging from Australia is com which is an automated system designed to enable the supply chain to make applications. However, its drawbacks are that it is still being anglicised and made to fit the UK legislative framework as is in many was a not bells or whistle unintegrated solutions that sit as a standalone product independent from other financial and ERP based technology systems. 

• A great project management tool for document storage and collaboration EADocs, but put simply, it skips the whole cash-flow management and project payment issue which cripples the progress of construction and its evolution.
  
  
• A homegrown UK product is Webcontractor which pitches “take control of your sub-contractor compliance and management” – reading between the lines this product is there to muzzle the supply chain and is solely focused at tier 1 contractors attempting to force a compliance portal system on to the supply chain. It offers little choice to the supplier and, as with all technology; unless the cultural migration to tech-based solutions in lieu of paper processes is managed properly, this solution may receive little thanks from the suppliers.

• Finally, the market leader is Textura who were originally from the US and are now backed by the reliable tech giant Oracle, this solution has everything the entire supply chain could ask for; including, an on-boarding team designed to help migrate from existing paper driven processes to the solution, compliance management, real-time auditable evidence trail, integration with other financial and EROP based products, i.e. existing business technology based infrastructure and last, but not least, the ability to plug in a bespoke banking facility in the guides of supply chain finance which allows the balance sheet liquidity of large procurers to the strengthen the stability of their supply chain.

Ultimately there is no holding back the digital tide however much some construction King Canutes might like to hang on grimly to control of the sector’s cash flow. The technology can, finally, achieve what more than 20 voluntary late payment codes failed to do and speed up cash delivery to hard-pressed SMEs.

It can also considerably ease the whole process of preparing tenders and demonstrating compliance for firms that have always struggled to resource those things properly.

The argument is no longer about whether the process will go digital or not; it is now about choosing the right platforms. That is the next big challenge and BESA’s legal and commercial team will continue to burrow its way through the myriad technologies to ensure members have all the relevant information before taking the plunge and to help them deal with evolving supply chains.

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