Construction supply chain payment charter

Revision as of 08:11, 5 October 2020

Introduction

Construction 2025, the government's long-term vision for the future of the construction industry, cited equitable financial arrangements and certainty of payment as critical success factors for the industry and proposed a need to '...create conditions for construction supply chains to thrive by addressing access to finance and payment practices.'

In response to this need, the government launched a new Construction Supply Chain Payment Charter on 22 April 2014. This built upon payment provisions set out in the Housing Grants, Construction & Regeneration Act 1996 (as amended); the Late Payment of Commercial Debts Regulations 2013; the Fair Payment Charter; Cabinet Office Procurement Information Note 2/2010; and the Prompt Payment Code.

2014 Charter

Announced by the Construction Leadership Council, which reports to the Department for Business, Innovation & Skills (BIS), the Charter was prepared by the Institute for Credit Management following consultation with clients, contractors, suppliers and consultants.

The Charter set out 11 fair payment commitments:

1. We will make correct full payment as and when due for all work properly carried out, or products supplied, in accordance with the contract. 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.
2. We will not deliberately delay or unreasonably withhold payment.
3. For all new contracts we will ensure that payments are made to our supply chain not more than 60 calendar days from the end of the Calendar month in which the work is carried out or products are supplied. From June 2015 we will ensure that payments are made to our supply chain not more than 45 calendar days from the end of the calendar month. From January 2018 that will decrease to not more than 30 days.
4. Public authorities are already required to pay within 30 calendar days. On central Government contracts, payment will be made to Tier 1 within 14 days, to Tier 2 within 19 days and to Tier 3 within 23 days of the due date, which will be 7 days after the common assessment or valuation date established by the client in the Tier 1 contract.
5. We will either not withhold cash retention or ensure that any arrangements for retention with our supply chain are no more onerous than those implemented by the client in the Tier 1 contract. Our ambition is to move to zero retentions by 2025.
6. We will issue any 'pay less' notices at the earliest opportunity and no later than 7 days prior to the final date for payment.
7. 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.
8. We will make payments electronically unless agreed otherwise.
9. We will use Project Bank Accounts on central Government contracts unless there are compelling reasons not to do so and on other contracts where appropriate.
10. Where Supply Chain Finance schemes allowing members of the supply chain to secure earlier payment are offered, we will not impose fees or costs for receiving payment within the terms set out in the contract.
11. We will adopt a transparent, honest, and collaborative approach when resolving differences and disputes.

Clients, contractors and sub-contractors in the public and private sector could sign up to the Charter. However, when it was launched, just nine companies had committed to adopting it. In addition, concerns were expressed about how the charter would be policed and enforced, and it was suggested that with no accompanying legislation, it may have little effect.

The Charter itself simply stated that '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.'

The Chartered Institute of Credit Management (CICM) was tasked with devising a method for monitoring compliance and devising KPIs but no details were ever published.

2016 revision

In December 2015, Construction Manager reported that a revised Charter was expected to be launched early in 2016, but that this was not universally supported. In August 2016, the revised Charter was published to which 19 organisations had signed up.

The revised Construction Supply Chain Payment Charter commits that:

Construction Supply Chain Payment Charter signatories agree that on all new construction contracts [1] they will meet the fair payment commitments set out below:

1. We will make correct full payment as and when due for all work properly carried out, or products supplied, in accordance with the contract. 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.
2. We will not deliberately delay or unreasonably withhold payment.
3. For all new construction contracts we will ensure that payments are made to our supply chain not more than 45 calendar days from the end of the Calendar month in which the work is carried out or products are supplied. From January 2018 that will decrease to not more than 30 days.
4. Public authorities are already required to pay within 30 calendar days [2]. On central Government contracts, payment will be made to Tier 1 within 14 days, to Tier 2 within 19 days and to Tier 3 within 23 days of the due date, which will be 7 days after the common assessment or valuation date established by the client in the Tier 1 contract [3].
5. We will either not withhold cash retention or ensure that any arrangements for retention with our supply chain are no more onerous than those implemented by the client in the Tier 1 contract. Our ambition is to move to zero retentions by 2025.
6. We will issue any 'pay less' notices at the earliest opportunity and no later than 7 days prior to the final date for payment [4].
7. 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.
8. We will make payments electronically unless agreed otherwise.
9. We will use Project Bank Accounts on central Government contacts [5] where specified by the client.
10. Where Supply Chain Finance schemes allowing members of the supply chain to secure earlier payment are offered, we will not impose fees or costs for receiving payment within the terms set out in the contract.
11. We will adopt a transparent, honest, and collaborative approach when resolving differences and disputes.

Notes:

• [1] As defined in Part 2 of the House Grants Construction and Regeneration Act 1996
• [2] Public Contracts Regulations 2015
• [3] Procurement Information Note 2/2010
• [4] The Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended by the Scheme for Construction Contracts (England and Wales) Regulations (Amendment) (England) Regulations 2011
• [5] Cabinet Office - A Guide to the Implementation of Project Bank Accounts in construction for Government Clients

NB: Companies must be signatories to the Prompt Payment Code before they can apply to become a signatory to the Construction Supply Chain Payment Charter.

2018 revision

In January 2018, with the payment period due to reduce to just 30 days, it was reported that only 35 companies had signed up to the charter, four years after its launch. Only three of these are main contractors, and two are private clients. The last new firm to commit to the payment pledge was in August 2017.

CEO of the Specialist Engineering Contractors’ Group, Professor Rudi Klein said; “It’s a dismal failure and a distraction. I think the CLC and the Department of Business, Energy and Industry should make a statement about the failure of policy. The Charter has had no impact whatsoever. In fact while the Charter has been around payment periods have got worse stretching out to 50 days and 60 days.”

Industry performance

In July 2018, the leader of the Liberal Democrats Sir Vince Cable said that the supply chain finance initiative, which he helped to create during his time as Business Secretary in the coalition government, is being abused and should be scrapped.

Further criticism came later in the same month when a Build UK survey found that none of their Tier 1 members (including large contractors such as Balfour Beatty, Vinci, Sir Robert McAlpine and Skanska) currently pays their suppliers within 30 days on average, despite all having committed to doing so.

Build UK said that the data represented a "bold first step" and that exposing the poor performance “demonstrated a real commitment to addressing this long-standing issue and will help to drive good practice”.

Neil Walters, national chair of the National Federation of Builders (NFB), hit back at this, saying: “Procurement regulations already require 30-day payment terms down the supply chain, but the first thing Tier 1 contractors do is change the contract terms to suit their interests and all but force SMEs to sign the amended terms to get paid.

“Seeing Build UK portray tier one contractors like industry pioneers is the ultimate insult. Build UK members, who make up less than 1% of the construction industry, are failing the 99%.”

Find out more

Related articles on Designing Buildings Wiki

• Cash flow.
• Construction clients' charter.
• Construction operations.
• Fair payment practices for construction.
• Late payment.
• Main contractor’s discount.
• Payment.
• Payments to nominated sub-contractors.
• Project bank accounts.
• Prompt payment code.
• Remedies for late payment.
• Retention held in trust fund.
• Scheme for Construction Contracts.
• Small Business, Enterprise and Employment Bill.
• The causes of late payment in construction.
• The Housing Grants, Construction and Regeneration Act.
• The Late Payment of Commercial Debts Regulations 2013.
• The problems with retention.

External references

• The NSCC Fair Payment Campaign.