The North East’s construction and civil engineering industry has thrown its weight behind The Journal’s Pay Fair campaign.
Launched in October 2014 at Newcastle University Business School, the initiative calls for companies in the region to take a responsible and ethical approach to paying firms within their supply chains. We are also asking firms to sign the Business Ethics Pledge, created by North East Institute of Business Ethics, to commit them to better ways of doing business.
A host of well-known names have already backed the campaign, including Owen Pugh Group chairman John Dickson, who recently stepped down as chairman of the Civil Engineering Contractors Association (North East).
Now his replacement at the organisation, Chris Dancer, of Prudhoe-based Northumbrian Roads, has also pledged his commitment to the cause, both on behalf of his company and the association as a whole.
CECA (North East) represents and provides guidance to more than 70 firms within the region.
Other member companies to sign the pledge include Joyce Construction and Civils of Corbridge, and Metnor Construction, based at Killingworth.
Mr Dancer, who is now urging all within the organisation to uphold prompt payment principles, said: “While the problem of late payments has been receding to some extent, it continues within our industry between some Tier 1 main contractors and firms they sub-contract work to, in assisting them on large projects.
“This particularly arose with the onset of recession, where the biggest firms made suicide bids for work – bids they knew would give them insufficient or even no margin but would give them a workload at the expense of smaller firms.
“We know, for example, that some firms which signed the Government’s Prompt Payment code are in fact breaching the terms.
“A continuation of delayed payments to make some big firms’ balance sheets look healthier will damage the industry since firms they are indebted to will not be able to create as many apprenticeships as the industry needs – and may yet even be forced to close.”
According to the CBI, £30bn is owed to UK firms - many of them SMEs - as a result of late payments.
Douglas Kell, director of CECA (NE), added: “This organisation pays its bills promptly and we are confident most if not all of its members do.
“If we all set an example and show it publicly by signing up to Pay Fair it may hopefully nudge or even shame some of the biggest companies that don’t.”
Q: From your enquiries among CECA members regarding late payments, what trends are emerging? Your blog tells of continued financial strain on contractors since they are now having to pay more for materials while being bound by tight margins within fixed price contracts awarded during the recession. Presumably, late payment aggravates this?
A: The trends, particularly with smaller SMEs, are that late payment practices are disappearing between clients and contractors, with many clients - particularly public sector - paying on time and in accordance with their terms set out. But late payment practices remain between Tier 1 main contractors and their sub-contractors. This is because it is the larger main contractors that are under cash strain, caused by initial suicide bidding. This has led to insufficient, or even no, margin, which is then exacerbated by long-term price contract fixing.
Q: A survey by the pressure group StreetwiseSubbie.com suggested more than 90% of specialist contractors were having to wait more than 30 days to get paid on public contracts. Might that be so in the North East?
A: Yes, although it is improving as the general climate improves. Specialist subbies are now in demand and can ‘dig their heels in’ on payment terms.
Q: Have you personally come across any outrageous examples of delayed payment?
A: Yes, they are always Tier 1 main contractors on tight (or no) margins who will use all the tricks in the book to delay payment - or part pay interim accounts for up to 150 days in some cases.
Q: What now for the Tier 1 companies so affected?
A: They must start adding profit margin on their bids and stop ‘suicide’ bidding – the deliberate pitching below the market level in the hope they can ‘screw’ the supply chain down later.
Q: Some clients are getting round a 30-day payment pledge by adopting a 15-day break after the 30 days ‘for final consideration of the invoice’, then are reimposing a further 30-day period, giving a 75-day leeway in clear breach of the spirit of prompt payment. What do you say about this?
A: The Prompt Payment Code doesn’t guarantee 30-day payment, but it is meant to guarantee payment within agreed terms between the parties. Sadly, some firms believe they’re prompt when they’re not. The contractual mechanism for submission, approval and payment of interims accounts can be vague and so can be taken advantage of by the ‘smart’ quantity surveyor. There’s a challenge system in place, but it should be used more readily.
Q: There’s talk of sharequoted companies withholding their payments to make their own financial figures look more attractive to investors in stock exchange announcements. True?
Q: And are some companies that have signed the Government’s Prompt Payment code in fact still breaching the terms?
A: Yes, and they should be challenged under the system. But sub-contractors have been scared to challenge (or even embarrass) their main contractors for fear of rebuff. But as demand for them increases, SMEs are more selective, picking and choosing their battles now!
Q: How bad is late payment in respect of public sector contracts now?
A: Apart from a few isolated cases, public sector contracts are paid quicker than 60 days.
Q: How bad is it in respect of private sector contracts?
A: Private sector contracts tend to contain longer payment history. This, longer-term, adds to costs as the supply chain will bid accordingly.
Q: How bad is the problem within the sector?
A: Payment within the supply chain had been particularly poor during the recession, with the ridiculously low margins pressurising cashflow. The situation is improving and the banking sector no longer views construction and civil engineering as very high risk.
Q: As a regional chairman of CECA, you said from the outset you wanted members to act fairly towards each other. Is that happening?
A: CECA North East will conduct a survey on this. My personal experience is that this is happening.
Q: Has your sector suffered worse than other sectors?
Q: Why?A: Because of the very low average profit margin the industry has found itself with, and the subsequent need to protect cashflow.