Home Features LEGAL: Supply Chain Payment Charter reviewed

A construction ‘Supply Chain Payment Charter’ that sets out payment terms of 30 days has been agreed by the Construction Leadership Council (CLC), the body set up to deliver the government’s industrial strategy for construction.The charter sets out 11 ‘Fair Payment Commitments’ including a commitment to reduce payment terms to the supply chain to 30 days from January 2018. Barrister, Professor Rudi Klein, delves into the new payment charter.

In announcing the launch of the payment charter the editorial in the last issue of SpecFinish said: “Let’s hope the new Supply Chain Payment Charter will tackle payment practices.”

‘Hope’ rather than ‘expectation’ is probably the best word to use in these circumstances. Although the charter was launched by the chief construction adviser on 22 April there hasn’t been a vast outpouring of acclaim from the industry. In fact the response has been decidedly muted.

PAST EXPERIENCE
Some of this may have to do with past experience. The table sets out the various initiatives and commitments on payment that have emerged over the last eight years. Looking at the table one has to ask the question: what will the new charter add to all this activity such that it will make a difference?

2006: 2012 (Olympic) Construction Commitments (extended in 2008 to all construction)“all contracts will incorporate fair payment practices”.Supported by government and industry.
2007: Guide to best “Fair Payment” practices launched in 2007 by the (then) Office of Government Commerce with support of industry.Recommended Fair Payment Charter, max of 30 day payments, PBAs and payment performance being a pre-qualifying criterion for public sector works.
2008: Construction matters– Report of the Business & Enterprise Select Committee“we urge [the Government] to require all parts of the public sector to end retentions as soon as possible”.
2009: Decision of Government Construction Clients Board“to make fair payment……..practices a contractual requirement on all central government construction contracts”.
2010: Cabinet Office Procurement Information Note 2/2010.

  • On central government works payments to be made within 14 days (tier 1), 19 days from main contract due dates (tier 2) and 23 days from main contract due dates (tier 3).  This is also advised as best practice for the rest of the public sector.
  • Project bank accounts to be adopted unless there are compelling reasons not to do so.
2011: Amendments to Construction Act.

UNDERTAKING TO BE GIVEN BY CHARTER SIGNATORIES
“By becoming a signatory to this charter, an organisation agrees to apply the fair payment commitments in its dealings with its supply chain, to be monitored for the purposes of compliance by reporting against a set of agreed key performance indicators (KPIs), and to consider the performance of its supply chain against the agreed KPIs when awarding contracts.”

At the time of writing KPIs have not been produced; it is expected that the Institute of Credit Management will develop the KPIs.

FAIR PAYMENT COMMITMENTS

Payment periods: The key commitment is that by January 2018 there will be 30 day payment periods. As of now all payments must be made within 60 days, reducing to 45 days by June next year.

The payment periods start from the end of the calendar month in which work is carried out. Immediately there is some confusion here. The periods should start from the due dates for payment set out in the contract.

Under the Late Payment of Commercial Debts all public bodies must now pay within 30 days. On central government contracts payments must be made to tier 1 contractors within 14 days of the main contract payment due dates. Tier 2 and tier 3 contractors must be paid within 19 days and 23 days – respectively – of the main contract due dates.

Further more central government procurers must use project bank accounts unless there are compelling reasons not to do so.

Withholding payment: “We will ensure any withholding of payment due to defects or non-delivery is proportionate, and clearly, specifically and demonstrably justified in line with the arrangements set out in the contract.”

This commitment is rather woolly. What if the arrangements in the contract are onerous? For example, what if the contract enables the paying party to set off ‘anticipated losses’? Such commitment is difficult to enforce.

“We will not deliberately delay or unreasonably withhold payment.”

Again an open-ended commitment that will be difficult to enforce. The following commitment is precise and, therefore, enforceable.

“We will issue any ‘pay less’ notices at the earliest opportunity and no later than seven days prior to the final date for payment.”

Variations: “We will have processes in place to enable the effects of contract variations to be agreed promptly and fairly and payments for such variations to be included in the payment immediately following the completion of the varied works.”

This commitment is very helpful in improving cash flow; payments for varied works are often left to the end of the job.

Prof. Rudi Klein is chief executive of the Specialist Engineering Contractors Group
www.secgroup.org.uk