As part of its continued focus on educating and supporting the construction industry, contractor software provider Payapps presented a live webinar entitled ‘Construction Payment Practices Review – Building a Responsible Payment Culture’, where a panel discussed potential amendments to UK construction payment legislation and reporting.
Industry experts shared their insights on building a responsible payment culture within the construction industry. During the webinar, participants had the opportunity discuss Payment Practices and Performance Regulations with the Chair and Industry Payment Advisor, Rob Driscoll.
The Payment Practices and Performance Regulations 2017 requires the UK’s largest companies and LLPs to broadly report every six months on their payment practices, policies and performance for financial years beginning on or after 6 April 2017.
Given the persistent issue of late payment to small or medium-sized enterprises (SMEs) the government recently sought views on proposals to amend and improve the Payment Practices and Performance Regulations and whether they should extend beyond their current expiry date of April 2024. Following the consultation, the necessary legislation is now being put in place.
STOP PRESS! The latest on UK Construction Payment Legislation and Reporting
The consultation response can be found here and here is the draft Statutory Instrument (SI)*, laid and currently moving through the parliamentary process. Essentially:
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- On 2 October 2023 the Secretary of State announced the intention to amend the Regulations to include reporting on retention payments for businesses in the construction sector. The Government response to the public consultation on the amendments to the Payment Practices and Performances Regulations 2017 was published alongside the Autumn Statement 2023, and confirmed the introduction of a requirement for qualifying businesses that are parties to construction contracts to report on their retention payment policy and key statistics in relation to retentions.
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- An initial draft Statutory Instrument (SI) was laid in January, to come into force from April 2024. This will extend the Regulations a further 7 years and introduce some of the new reporting metrics. Due to the imminent sunset clause in the existing regulations of 6 April 2024 and to avoid delay whilst further industry dialogue takes place. The first SI does not include reporting on retentions as a requirement. This industry work has now been completed and we expect Government to lay a second SI before Parliament in 2024.
The draft SI:
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- Will extend the applicability of the regulations to 6th April 2031.
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- Provide for reporting of the sum total of payments which were not made within agreed payment period.
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- Provide for a statement of the percentage of these payments which were not made within the payment period as a result of a dispute.
We’ve yet to see how the data can be authenticated, but every step forward is significant towards transparent open measurable payment systems which inform future procurement decisions. In other words, if you can’t demonstrate your payment performance, you can’t win work and succeed.
Interesting that the consultation asked about human cost of administering and reporting, which totally overlooked the role technology has played – perhaps that is why the Government response was silent in this area.
When this issue is undressed, it simply comes down to open source clear automated Management Information so that trading partners, supplier and Government as a client and a regulator can make more informed decisions.
Following the webinar, Payapps held a Q&A with Rob to gain his insights on the nuances of the payment reporting metrics.
Rob Driscoll chairs the Cabinet Office Payment Advisory Group, has advised Build UK’s Payment and Contracts Groups, sits on CLC’s Business Models Payment, Retentions and Contracts Group (as well as being the digital lead for these areas), and is ECA’s Director of Legal and Business.
How are the construction payment reports accessed?
The statutory payment reports can be accessed via a Government website. There are also league tables for construction on Good Business Pays and on Build UK. The league tables demonstrate the comparative results of the current payment data across the industry.
What checks are made on the payment times that are reported, and how do we know they are true?
No checks are made on the payment times that are reported. Failing to report, or intentionally publishing false or misleading information, is a criminal offence under the Regulations and both the qualifying business itself and its directors (or designated members) may be liable to a fine.
However, directors (or designated members) have a defence if they can prove that all reasonable steps were taken (this has not been defined) to ensure that the requirements under the Regulations were satisfied. The defence that the publishing of false or misleading information was ‘unintentional’ or ‘reasonable steps’ were taken is wide and ensures the threshold for prosecution is high.
The directors can only rely on the information presented to them at the time, and as with an audit, the director will not have knowledge of whether the underlying information on which the report is based is correct, accurate and fair, unless they can run a report from the digital tools used to measure and monitor payments.
The challenge is that there is no current way to check that the accuracy of the data or that the data-collection methodology complies with the Building Regulations or the Regulations’ statutory guidance.
If the government moves to clamp down on this weaker area of the Regulations, large firms would have to ensure they have digital tools in place which allow them to produce accurate reports in the manner required under the Regulations.
Are we likely to ever see reporting that factors in the application approval process, i.e. reporting that’s more specific to the construction industry?
We may not necessarily see this, given the nature of the Regulations. The Regulations apply to all large firms regardless of the area of commerce. The Regulations do not seamlessly apply to construction, as the common industry practice is to invoice after payment is received and to navigate the payment requirements of the Housing Grants, Construction and Regeneration Act 1996.
However, the public sector accounts for 35% of demand, on average, within construction and facilities management. Therefore, we may begin to see public sector clients using digital tools to enhance their supply chain visibility of cash-flow in order to comply with the new UK Procurement Bill which will mandate a 30-day payment timeframe at Tiers 1, 2 and 3 of the supply chain.
As a metric, a report highlighting the amount applied for versus the amount paid would indicate that applications are either over-inflated by the payee, or applications are generally de-valued by the payer, and might expose which trades tiers, or specific parties this type of trend would relate to. It could then by scrutinised in order to improve the supply chain performance and collaboration in order to secure successful project delivery. Management information capable of being scrutinised is widely recognised as a key method of unlocking productivity and business performance improvement.
If our client doesn’t meet the criteria to report officially, what information should we be asking them for to understand their credibility as payers?
The Regulations require payers to report on the speed and now value at which they pay, regardless of the amounts being paid.
Data which can inform you as to whether the payer is a party you would wish to trade with may include any of the following:
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- Average volume of payments made versus Average value of payments
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- Average volume of payments paid 0-30 days
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- Average value of payments paid 0-30 days
- Average value of payments paid 0-30 days
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- Average volume of payments paid 0-60 days
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- Average value of payments paid 0-60 days
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- Average volume of payments paid 60+ days
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- Average value of payments paid 60+ days
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- Average volume of payments paid out of time
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- Average value of payments paid out of time
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- % payments within £0-1,000 and average contractual payment period
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- % payments within £1,000-10,000 and average contractual payment period
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- % payments within £10,000-100,000 and average contractual payment period
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- % payments within £100,000-500,000 and average contractual payment period
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- % payments within £500,000-1,000,000 and average contractual payment period
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- % payments within £1,000,000+ and average contractual payment period
These metrics are indicative of the payer’s inherent fair payment behaviour. It does not prevent the subcontractor from running into problems, but is strongly indicative of a cultural and systems-based approach to payment.
The most critical point is to check the contractual payment window from application to final date for payment which determines how long the overall delay in payment (your ongoing exposure) on a cyclical basis you are agreeing to.
Will the criteria for those required to report be lowered in future, so more can easily be compared?
Firms that exceed 2 of 3 tests on a consistent basis are required to report. The test consists of a balance sheet threshold and a turnover threshold for a company of 250 employees or more. Even if not lowered, by elapse of time more firms will have to report as their balance sheet total and turnover total will exceed the threshold requirements, even where they do not have more than 250 employees.
Should we be asking the client to make all payments to each subcontracting party?
This is a client decision based on what procurement route they would like to employ in order to secure project delivery. Procurement routes which can make direct payments to lower tiers of the supply chain can include naming/nomination forms of contract, construction management, and projects where a project bank account is used.
We would suggest that regardless of which procurement route is implemented, the use of digital tools to underpin supply chain integration and payment is essential. A process without streamlining and automation can lead to misunderstandings, lack of visibility, commercial uncertainty and ultimately disputes which compromise project delivery.
Getting paid for variations as a result of onsite instructions is a constant battle. Do you have any advice for managing this?
Evidence is everything and you cannot claim what you cannot prove. Whilst the contract will include a prescriptive process for how changes/variations are to be legitimately issued, claimed and valued, this will be meaningless unless both parties have access to a contemporaneous evidence bank.
A fair system could be the confirmation of instructions forming variations or changes (making a digital record). Those digital records can be substantiating evidence to support a digital application for payment allowing the parties to agree or disagree as appropriate.
Payers will struggle if claims are not sufficiently evidenced in-line with the contract and claimed contemporaneously as the project progresses. If there is delay, payers may not be able to recover those sums from clients upstream. Payees will equally struggle with cash flow; therefore, the automation of variation/change, requests/submissions, approval, valuations and payments are integral to project delivery.
Why can contractors self-certify deductions from the contract sum? These deductions ignore the fact that the subcontractor is already subject to a retention and that the subcontractor also has work in progress that they have paid for that hasn’t even reached valuation yet, but the subcontractor has already had to fund. Is abolition the best solution, given that so much cost is wasted in administering retention right through the supply chain?
Essentially, the model for payment in the vast majority of construction contracts is that payments are made progressively in arrears. In other words, after labour and materials are delivered and installed – on an interim basis with a final account reconciliation exercise carried out at completion, interim or progress payments are therefore nearly always subject to review.
The oddity of the construction business model is that the supplier identifies its price and the payer takes the contractual performance and then decides its worth.
Additionally, where a cash-retention is contractually used, it is theoretically there to protect against the risk of failure by the payee to remedy defects or failure due to insolvency. The issue with retention is that the payer is both custodian and claimant on the retention monies, which usually already sit within their accounts. This gives rise to a structural conflict of interest on the payer’s part. Automation of the retention process could require the cash retentions to be automatically released, unless the payer is able to log evidence to substantiate a claim on cash retention preventing its release.
Great point regarding retention – why not pay into Escrow?
One reason this has not previously happened is due to the fact that the industry had no visibility of how much retention was held, what the contractual triggers for release were, and what evidence justifying non-release exists. This has recently been addressed with the Department for Business and Trade announcing that they are going to proceed with proposals to require large construction companies to divulge retention data.
Once the industry resolves what reforms take place and when, it would be helpful for all parties in the sector to have transparency. The ability to digitally tag the contractual retention requirement and track it through the interim and final payment system throughout the project life, it will improve visibility for all and unlock the release or legitimacy of retention. Automation of cash retention release could bring clarity to the industry debate on what reform, if any is required.
It is not necessarily the experience of all subcontractors that contractors pay late, but it does occur often. What is the reason for late payments?
There are no doubt two explanations for late payments. The first reason is disagreement on the valuation, i.e., payer disagrees with payees’ application and pays less. Digital tools cannot directly deal with the substantive valuation process as this is subjective, but it can provide evidence and clarity, by offering substantiation and corroboration on why the parties disagree. This allows them to have a dialogue to resolve the differences before it escalates into a dispute.
The second reason is procedural; where one party has not complied with the contractual procedural requirements for getting paid with the result that the situation escalates into an unnecessary dispute. Automation can resolve this by streamlining and automating the Housing Grants, Construction and Regeneration Act 1996 process in order to de-risk and bring transparency and certainty to the parties.
Contractors typically hold the cards due to their size and leverage and contracts are not equal. What are your thoughts on this?
Undoubtedly, some parties can display unfair and onerous practices. However, unless the parties have transparency within the relationship they cannot know where they stand and work towards a resolution of any disagreement.
The reports filed under the Regulations are designed to help SMEs make more informed commercial judgments over the longer term about their trading relationships. It is widely accepted that during a positive economy, quality firms aim to work with those who are commercially fair. Negative commercial behaviour by payers therefore compromises quality and delivery and can be counterproductive in the longer term.
Overall, if the government can make the Regulations more relevant to construction, it will be fairer for both parties. In the meantime, businesses will benefit from greater transparency and the automation of cash retention can enlighten the industry on what reform, if any is required.
Many thanks to Rob Driscoll for answering our questions so comprehensively.
