Late payments to small and medium-sized enterprises (SMEs) are a real issue. SMEs report that this is the most important issue for them after access to finance. Data from BACS shows that in 2012 SMEs were owed over £36.4bn in late payments, and that this problem is getting worse in the current economic climate.
The All Party Inquiry into Late Payments was convened by Debbie Abrahams MP to investigate the issues associated with late payments to SMEs, including the macroeconomic effects, the current tools being used to address late payments and additional measures that could be introduced. It consisted of a evidence and hearing from witnesses including economists and business academics, business organisations, suppliers, and FTSE companies.
The inquiry made 11 recommendations to support small and medium sized businesses across all sectors of the economy in its final report published last week. However, it found that the construction industry was one of the “worst offenders” for paying late and that small companies were “bullied” by large ones.
The report suggested that the government should pass laws to establish a construction code of conduct and ensure retention payments are held in a trust. The inquiry also recommended the government require information about a firm’s payment record as part of the pre-qualification process when it tenders work.
The MPs also said fair payment should be written into contracts on public sector jobs. It suggested that tier one suppliers should be paid within 14 days, tier two contractors be paid within 19 days and tier three contractors then paid within 23 days.
The full report can be read here
Steve Paul, managing director of Staffordshire-based SDP told the inquiry how main contractors withheld payments totaling £1.2m had sent his separate plastering business, which he had built up over 25 years, into administration. “It’s organised crime really, they know what they are doing and they are playing with us. They hung me out to dry,” he said.
Steve Sutherland, chair of Huddersfield glazing contractor Dortech, told MPs he had been owed £500,000 from a major international corporation, comprising numerous small payments and retention payments, before reaching a settlement which still left him £192,000 out of pocket. He said because most of the payments withheld were around £5,000 the costs of adjudication made it uneconomic to fight for them. He said the contract terms were “onerous” and pushed all risk down the supply chain.
Debbie Abrahams wrote: “A recurring theme in the evidence given was that, ultimately, the issue is one of leadership. Until top CEOs, and their executive board members, make a decision to act ethically in business, and treat our small and medium sized businesses fairly, this problem will persist.
“The public has grown tired of hearing about huge, greed driven, pay packets, pay-offs for failure and tax evasion; but allowing a culture of late payment to persist unchallenged is another board-level decision that directly effects ordinary, hardworking, people across the country.
The other members of the MPs’ panel were: Mike Crockart, Liberal Democrat MP for Edinburgh West; Alex Cunningham Labour MP for Stockton North; Caroline Dineage, Conservative MP for Gosport; Rt Hon Michael Meacher Labour MP for Oldham West and Royton; Toby Perkins Labour MP for Chesterfield; and Robin Walker Conservative MP for Worcester.
Recommendation 1: The Government should promote the adoption of ‘good practice’ guidance for large companies in managing supply chains, including publishing performance data relating to payment-on-time to suppliers in audited annual accounts.
Recommendation 2: The Government should encourage businesses to publish information for investors and shareholders defining their support of, and compliance with, ethical business practice, for example, signatories of FTSE4Good Index Series or Ethical Trading Initiative.
Recommendation 3: The Government should support SMEs avoid late payments through free, high-quality financial management advice and/or training, for example, through trade associations, SME organisations, or local SME advisors.
Recommendation 4: The Government should work with SMEs and support the establishment or development of trade associations to negotiate, e.g., a Fair Treatment Charter, on behalf of member organisations.
Recommendation 5: The Institute of Credit Management should review and amend the PPC to reflect the issues identified.
Recommendation 6: The Government should establish a Construction Code of Conduct, similar to the Grocery Code, with an independent adjudicator for mediation. To ensure that large companies are not intentionally delaying payments to suppliers for their own financial purposes, the contractually agreed payment should be held in an independent trust. Once all the conditions for that contract have been met, the payment can be made to the supplier. A Credit Ombudsman will arbitrate in disputed cases. This will require legislation
Recommendation 7: The Government should introduce a Retentions Monies Bill with money retained by a customer for a supplier to be held in a trust.
Recommendation 8: The Government should require all new Government contracts to include Pre Qualification Questions on past payment performance, and should consider the payment history as part of the bidding process.
Recommendation 9: The Government should make fair payment a contractual requirement for new Government contracts, with Tier 1 contractors paid within 14 days, Tier 2 within 19 days and Tier 3 within 23 days. 4
Recommendation 10: The Government should support intermediary agencies, e.g., SME organisations or trade associations, to act on behalf of suppliers seeking recompense through Late Payments Directive.
Recommendation 11: The Government are urged to implement a growth strategy that recognises the importance of SMEs and to commission research to assess the macroeconomic effects of late payments on SME suppliers.