Tuesday, January 15, 2019

Payment reform should be Carillion legacy

Punishing the guilty is important, but there must also be a positive long-term legacy from Carillion, according to the Building Engineering Services Association (BESA).

Carillion went into compulsory liquidation exactly a year ago, with a reported £7bn of liabilities and just £29m left in the bank. It now seems that the company may have been trading insolvent for some years and there continues to be a clamour for the management to face justice.

The damage – both human and financial – continues to reverberate. As well as almost 3,000 staff losing their jobs, several of Carillion’s subcontractors have subsequently been forced out of business as a result of unpaid invoices.

The accountants appointed to oversee the liquidation process PwC have, however, managed to secure more than £50m in fees in the past 12 months – good work if you can get it!

The union Unite is, not surprisingly, outraged that nobody has so far been prosecuted for overseeing one of the largest corporate failures in UK history and continues to hound the government to make examples of Carillion’s directors. If there has been wrongdoing, then it is important that people are held to account.

However, there should also be a positive outcome from this bleak story: Real, meaningful reform of payment practices in construction.

Draft legislation to reform the widely abused practice of payment retentions had been launched in Parliament – with impressive foresight – just days before Carillion collapsed. Proposed by Peter Aldous MP and heavily influenced by BESA and the ECA, this legislation has gone on to receive the support of more than 270 other MPs and will have its second reading in the House this year.

It seeks to ensure that all retention money is held in a ring-fenced account so that it cannot be lost in the event of an insolvency.

Carillion was holding £800m in unpaid retentions when it went under – effectively taking all that working capital with it – and, despite their £50m in fees, PwC have been unable to recover any of it for the SMEs who have been left to pick up the pieces over the past 12 months.

The lobbying around the ‘Aldous Bill’ has prompted a series of activities including a hard-hitting report from the department for Business, Energy and Industrial Strategy (BEIS) Select Committee, which took evidence from a group of BESA members.

The committee has urged the government to introduce statutory requirements to pay within 30 days and introduce legislation for cash retentions be held in independent bank accounts.

The Cabinet Office has also threatened to remove contractors from public sector projects unless they can demonstrate they are paying their supply chains on time.

“If government contractors are late with supplier payments, they could stop winning public contracts altogether – until they clean up their act,” said Cabinet Office Minister Oliver Dowden; adding that paying invoices promptly was vital to provide healthy cash flow “particularly for smaller businesses who are the backbone of the UK economy”.

Connecting fair payment to procurement is a powerful statement from government, which should make a real difference. It feels much more meaningful than the series of voluntary late payment ‘codes’ we have seen over the past 20 years.

Over £10.5bn of SME working capital is locked in retentions annually, with cash flow issues leaving them unable to invest in skills, training and ways to improve productivity.  Government research showed that £700m of retentions was lost via upstream insolvency in the three years before Carillion collapsed and the industry loses almost £1m each working day (£20m a month) in vital cash flow because of this practice of withholding sub-contractors’ money.

However, as well as the welcome political action, we have seen other examples of people trying to do the right thing.

For example, Network Rail has banned retentions and adopted project bank accounts as part of its new five-year £48bn investment programme.  Large contractors who work with the railway operator will also be obliged to pay their own supply chains within 28 days under new terms of engagement.

Healthy supply chains
The company’s chief executive Richard Beresford said the management had taken this step because “healthy supply chains are, quite simply, better for everyone”.

“Culturally, this sends a huge signal as to the value we place on a sustainable supply chain and the way we want to do business,” he explained.

He is not the only one to recognise that most specialist contractors operating within supply chains are keen to provide top quality projects. They realise that, in order to be able to do that, they have to invest in apprentices and other forms of training and recruitment to ensure they can access a well-stocked pool of skilled people.

However, the way in which many supply chains are structured and the difficulty of extracting payment in full and on time plays havoc with cash flow. This makes it hard for SMEs, in particular, to plan for the future and invest in as much recruitment and training as they need to keep up with demand for their skills.

So, if the collapse of Carillion is to have a silver lining, both construction clients and politicians must realise that many of the country’s problems with delivering vital infrastructure and built environment projects are down to easily avoided cash flow problems. It is hard to deliver top quality projects without ‘healthy’ supply chains that work well and in harmony. If suppliers are continually chasing cash – that is rightfully theirs – and have to compromise on quality in order to stay in business, the result is bound to be disappointment all round.

However, if the Aldous Bill is adopted by the government and fair payment practices become the norm, then positive impacts will quickly become evident.

For example, the government’s own research carried out in the wake of Carillion showed that contractors would hire more apprentices and address problems with productivity if they had access to the money withheld from them in the form of retentions.

Contractors are owed, on average of £27,000 per annum in unpaid retentions, which is equivalent to the investment a company paying into the Apprenticeship Levy would need to make to cover the cost of 15 apprentices a year.

For a company that does not pay the Levy [i.e. most of the SMEs in construction supply chains], that amount would more than cover the salary of an apprentice and a van with enough left over for new tools and equipment.

When asked what they would do with retention money if it weren’t withheld or lost, 48% who responded to the government survey said they would invest in new equipment and facilities, 40% would look to take on more work, 29% would employ more apprentices and 22% would allocate the money to taking on their first apprentice.

This means that as many as 3,000 extra apprentices could be recruited directly into building engineering services every year

A year ago, during the first reading of his Bill, Mr Aldous said the issue of retentions and fair payment went right to the heart of UK economic growth and the protection of small businesses. “The fact is that the smaller your business, the harder you get kicked,” he told the House of Commons.

“Ring fencing cash retentions will go a long way to solving the large losses SMEs absorb from upstream insolvencies in the construction industry. My Bill aims to help those SMEs affected and get the construction industry building.

“The current system is being widely abused with tier two and three contractors effectively forced to provide working capital to those at the top of the chain.” This acts as a disincentive for SMEs to take on work, create jobs and recruit apprentices, “which are all things that the country desperately needs right now”, he added.

“I think everyone is fed up of hearing politicians say they are going to build one million new homes in five years,” said Mr Aldous. “They want us to get on and do it – and policies like this can help by increasing the velocity of cash moving through the supply chain.

“If we are to solve our housing crisis, then we need the construction sector to be in top gear.”

One year on, those words still ring true and they have made a difference.

So, while it is right and proper to continue pursuing those who brought so much misery on so many people, we must also look to the future and continue to push for the legislation that will ensure the next major construction insolvency does not cause the same misery and disruption.

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