In an interview with Rob Driscoll, Director of Legal & Business at ECA and construction payment expert, he discusses the latest changes to Prompt Payment and how application for payment management software like Payapps can help businesses stay up-to-date with legislation and industry requirements.
What is the Prompt Payment Code (PPC) in construction?
The Prompt Payment Code (PPC) is a code of practice designed to set minimum standards for payment practices between organisations and their suppliers. The code is completely voluntary, and businesses of any size can become signatories of the code.
The code was first introduced in 2008 and has been updated and revised since then, with the most recent changes coming into effect in January 2021. The code is a government initiative administered by the Office of the Small Business Commissioner (OSBC).
Click here for more information about the Prompt Payment Code in Construction.
In this transcript you’ll discover answers to common questions such as:
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- What are the latest changes to construction Prompt Payment and what effect are they likely to have on the industry?
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- Why have the construction Prompt Payment Code changes been introduced?
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- Are there other Prompt Payment Code changes to come?
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- Construction reporting regulations – what do I need to report?
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- How can technology help to manage legislative compliance and reporting in relation to construction payments?
Payapps: Please introduce yourself and explain your role as Director of Legal and Business at ECA.
Rob Driscoll: Okay, my name is Rob Driscoll, I am the Director of Legal and Business at ECA. My day job is I’m a solicitor and I have spent since 2003 coming in house from private practice as a lawyer looking after the business interests of nearly 3,000 and 4,000 contractors in the mechanical electrical space. That includes their non-contentious contractual queries to do with payments, reviewing documents, contracts to get into corporate joint ventures, all sorts of random, weird and wonderful things, as well as their disputes.
Typically, our client base will work either direct for the end clients, sometimes with consumers, and more often than not, they aggregate around tier two and three. In other words, they are working for main contractors or subcontractors or as sub-subcontractors. A couple of other hats I wear, which I probably should mention. I occasionally sit in the JCT Digital Group which sits slightly down in the JCT contracts structure advising on how you could make contracts smart. I also sit in the Construction Leadership Council’s business models workstream, working within the retentions group, the payment improvement group and the onerous clauses group, but I should say I’m not a spokesperson for that.
Thirdly, but certainly not least, I chair the payment group for the SME advisory panel to the cabinet office. That’s where cabinet office looks at public sector procurement, they spend £295 billion per year on procuring all sorts of things and amongst that a lot of construction and we look at how we can reconcile the payment landscape.
Payapps: Just for anyone that might have missed the news, can you give us a quick overview of what is going on in regard to the latest changes to prompt payment?
Rob Driscoll: Let’s go back to Carillion, straight after that there was a bit of a turn in thought process because I think prior to that, clients, particularly public sector would say, “Well, what happens in the supply chain is not our business. All we’ve got to deal with is the tier one relationship, our primary contract, we’re a strategic buyer.”
What we saw with Carillion’s downfall was, I think it was a public sector contract over five months and three profit warnings, that it caused a huge risk to daily public sector delivery in schools, in hospitals, as well as construction and FM. So one of these strategic suppliers suddenly went under, and this was a strategic supplier that also borrowed money from its supply chain by elongating its payment terms to 126 days, that’s nearly four months from the point at which the materials and the labour is delivered to site.
Post Carillion’s downfall, very much what we’ve now got is recognition amongst public sector and policymakers in government, that it’s all right saying, “I’m only concerned with tier one”, but the reality, and these are government stats, is that in the average supply chain it goes four to five levels deep, from client through to supply only materials or labour.
The average project goes 70 packages wide. The pyramid has quite a wide base. Therefore, the point at which your product is being delivered is highly divorced at the bottom of the supply chain from the point of procurement, which is at the top. There is also an emphasis post-Brexit on keeping liquidity in the UK and that means spending it with SMEs. There was a manifesto commitment to ensure that 33.3% of public spend was with SMEs. Now that could be indirect as well as direct. There’s quite a large shift in mindset from government both as a government and a client. As a client, government accounts for 35% of all construction spend or demand.
In that sense, and we know now coming out the pandemic that what’s happened is we had a kind of V-shaped crash certainly in England, other jurisdictions Scotland, Wales, Northern Ireland were slightly different, but by and large, the economy recovered it and over the summer of this year it actually bounced back to rates where there was more work around post-pandemic than there was pre-pandemic. There’s a lot of projects going on at the moment. There’s a lot of economic difficulties, but the shift is that government is taking this slightly more invasive approach.
Now the panel that I said I chair works under a large group, which answers to Lord Agnew. Lord Agnew is the minister currently in charge of public sector procurement, and he introduced a couple of years ago, a target that eventually if you want to work for the government, and they define that as contracts over 5 million because there is a de minimis level which they’re not touching yet, you would have to prove that you paid 90% of your invoices within 60 days. They get the data to prove that from the BEIS payment reporting website.
BEIS is the Business Energy and Industrial Strategy Department, where large firms under the law have to report their payment data if they meet 2 of the 3 criteria and they have to do that every 6 months. The day-to-day report is payments made within 0 to 30, 30 to 60, and 60 plus days. They’re taking the data from this one part of the government where you legally have to report if you exceed certain size criteria, and they’re using that to inform their procurement decisions over here. The latest development which is a PPN, Public Policy Procurement Note, these are guidance documents to the public sector to tell them how to procure, 08/21 says we’ve just increased that figure up to currently 85%, so it’s going to up from 80% to 85%.
They give a warning period that won’t come in until April next year, but as of that period, it was 80%, before that it was 75%. They’re slowly turning the screw up and up towards that 90% target, and what will happen eventually is they will exclude poor payers from public sector procurement, bearing in mind they are 35% of the demand in construction. That’s a significant leverage to improve people’s behaviour.
Payapps: You might have touched on this already, but why have these changes been introduced, and what problems was the industry previously facing?
Rob Driscoll: I think previously everybody was concerned with bilateral relationships. In other words, where am I in the supply chain, in the ecosystem of construction? Who do I want to work for? If it’s a down market, I don’t really have much choice. I’ve got to take the work that comes my way, and that might be people who perpetuate hard or bad commercial behaviour. In an upmarket, I can shop around and choose who I work for. The answer really is people are trying to be clever about the way they operate, regardless of where they are in the supply chain and people are willing to pay their suppliers if they get paid themselves.
What we can’t really do, and what government figured out it needed to do, is introduce some standard which sets the boundaries for payment. Now I said earlier, it was the metrics, the reporting about 0 to 30, 30 to 60, 60 plus, which is enshrined in law. Introduce the mechanism for reporting that data so it coalesces in one place. Then introduce a means of, instead of asking for more deterrence, sticks to beat people with if they’re wrong, to take them to court over this and the other – we know people still don’t do things just because they’re told to or there are biggest sanctions or fines or that stuff. What they’re trying to do is take a different approach.
I’d call it the pull not the push, so if you can’t win work, unless you can prove your performance data exceeds that threshold, that standard, I think that’s where they’ve taken a slightly different approach to it. But it involves transparency of metrics. I think that’s the critical thing here. What people have had to get over in the last few years is, “I need to start measuring how we pay people,” and they’d never done that before. I think that was quite a shock to the system.
Payapps: On a personal level, what do you think of these developments? Do you think they’re extensive enough and do you expect there to be more changes in the near future?
Rob Driscoll: On a personal level, I would try and issue a slight brag that I would hope, that I somehow influenced them. Certainly, some of them have been part of a design paper I put together some years ago, probably 2015, 2014, where you could bring these metrics, the transparency, the monitoring, the enforcement together, and the procurement. This is no different to large online retail firms, on a transactional level, which measure the dates your order was placed, it’s dispatched, it’s delivered, etc, and now you get a picture of the parcel on your doorstep, proving it. That’s the evidential draw backing up the transaction system.
If you think of retail where they ask you for a quick star rating when you finish the transaction. Next time you go on to the marketplace, you then filter by what you’re looking for, so you then might go to a trusted seller based on that star rating of other people’s experiences. I think I would say they are good initiatives, we have always encouraged the government parties to start to integrate what’s there, so the parts need to start talking to each other. If you look at the payment landscape, and we probably don’t have time to go through it today, they’re all great initiatives which have limited effect on their own, but there’s some other parts that’s greater than the whole and that’s what I believe what they’re trying to do now.
Are there more changes to come? Yes, there should always be. The only constant in life is change, use the cliche. For example, the reporting regs came in a couple of years back now. Under those regs, what you report is supposed to be when the invoice goes from the application for payment, because that’s the first day of the notified sum, but that doesn’t work in construction because we invoice after we’ve been paid.
What you report is the volume of transactions paid within 30 to 60 and 60 plus days. You can drown out a £500,000 transaction that was paid in 120 days with a load of £5 transactions that were paid on tap and pay, credit cards. Your day-to-day expenses, if you like, can drown out these major transactions. I think one of the developments I would hope that we’d see in the future, and there’s a consultation actually opened which closes early February on this at the moment, is about the success of the reporting regs and what needs to happen next.
I’m not entirely sure what time you’ll release this, but I’d urge anybody involved to say, “Well, that’s fine that we measure the volume of transactions but to get a true data picture of people’s payment performance, you also got to measure the value of the transactions being paid within 0 to 30, 30 to 60 and 60 plus”. Again, it will present some obstacles, nothing can be introduced overnight. People need to get used to it, work it out operationally, and how fundamentally this affects their systems and processes in the office and how they’re going to extract that data.
I think I’ll go back to my point about government as a client – HS2, Tideway, all these major projects and smaller ones, local ones, they are a client who not only procures construction, but they own it through its lifecycle. They have a different, more vested interest in the safe, well-designed delivery of projects and having a better relationship with their supply chain. In that sense, payment and the stability of cash flow and the commercial model of delivering the project is quite key to their vested interest. Hopefully, that answers the question.
Payapps: So, what will the various effects be for the industry, SMEs and for big businesses?
Rob Driscoll: Hopefully, the profound effect long-term for the entire industry, large, small, medium alike will be quicker cash flow. We saw a BIM mandate coming into this industry in 2016, which hasn’t taken off quite in the way people wanted it. It’s getting there, but it’s not as quick and the acceleration wasn’t quite there. I think what people are now realising all these years later is this system that we’ve got in construction under the Housing Grants Construction and Regeneration Act 96, which did fix as a piece of legislation problems that went before, gave rise to a compliance system. We have a funny process where we apply for payments.
There’s a due date, there’s a payment notice date, then there’s a pay-less notice date, then there’s a final date for payment on which you should actually receive cash. That’s why I refer to this Amazon transaction system of dates and communication. By and large, once you introduce the need for metrics through a legal requirement, and to prove your performance, people have to start being able to offer up their data for scrutiny, that creates transparency and monitoring. That’s the pull effect that I referred to earlier. I think that will scare some people who are able to exist in the opaque world of abusing the system I just described.
Actually, it’s the data that they want to scrutinise, so if you’re building a prison or a road or a school or anything else, you might take that vested interest I referred to earlier and say, “Look, we want to work with you, but we want to work and make sure that you are responsible supplier to us.” Don’t forget there’s another piece of law out there called the Public Contracts Regulations. Again in the public sector, tier one, two, and three each have to be paid within 30 days. There’s no way of proving or disproving compliance with that unless you’ve got the tools in place.
I think the only way you can really get to the position of proof is to have automated processes, dashboards that will give you that data. Fundamentally this cannot afford to be a paper process anymore. I was on a meeting last week and interestingly, I was explaining this to clients in the Scottish economy – right through the supply chain, these were representatives from all around – who were in slight disbelief.
Some of them said to me, “How come when I get off this call, I can be told exactly how many house points my daughter has at school, what her balance is when she uses her fingerprint to pay for her lunch, but I cannot find out which policies on a project have been paid?” There is no equivalent when it comes to construction. So I think our retail experiences will drive the demand in our professional life in construction to say this isn’t good enough.
Payapps: That leads us really nicely onto the next question which is, why is it going to be important for businesses to implement a digital-first system?
Rob Driscoll: I think there is a number of levels you can answer that, you can answer it on a level which is for some years now the industry talks about millennials or the next generation or the future leaders as sort-of white elephant species and unicorns because they have never been seen. I go on the record that I’m in my mid-40s, we were talking about this a long time ago and it wasn’t because I viewed myself as a particular pioneer in it. It was because, in my 20s and 30s, I was bored with looking at a piece of legislation that required paper to be driven backwards and forwards, when I could take my lunch hour to buy things online and it was seamless, transparent, accountable and could manage both parties’ expectations.
I think there is a generational thing there, but I don’t think it’s just there necessarily linked with the next generation. I think it’s actually linked with the incumbent generations that are already in our businesses. Secondly, the big driver will be the legal requirements, this complex nature. Actually, regardless of what happens in the economy over the next year in terms of labour shortages, materials crisis, and everything else, we might be in for a bumpy ride. Traditionally, through turbulent times in the economy, the one thing that’s stable and independent and countercyclical is public sector spend.
People tend to look to their order book and what public sector spend they have, to maybe derive survival in terms of their economic sustainability. If you’ve got tighter requirements in the public sector to qualify for work, to survive, you’ve got to perform better. Then when you come out of that downturn into a good economy, what you will start to see is this transparency offer up that, “I don’t want to work for you anymore because of the way you treat us. I will go and work for the other guys whose data is better, and they treat their supply chain fairly.”
That sounds very ethical and aspirational, but I have seen it done where the less ethical entity, I won’t say whether they’re consultants or anything else, has then had a crisis conversation saying, “Why is the quality of our supply chain so bad when X amount of the market work for us?” The answers come back, “Because of the way you treat them.” I do think the future of construction is in transparent ways of working, and some ethical commercial behaviour – and that will have an impact.
Payapps: And finally, how do you think a solution like Payapps can help businesses stay up-to-date with legislation and industry requirements?
Rob Driscoll: Digital solutions like Payapps – what you’re able to prove is the reality of the theory of what I’m talking about. I’m describing a system that sounds very aspirational, but actually, when you start looking at process mapping, it’s no different to having a digital leave request system for your HR department. I’ve been in organisations where I’ve seen that go from physical through to digital and cut numerous people’s time out. Not to make them redundant, to free their capacity up, to give them the mental wellbeing so they can get on with other tasks.
There can be a multitude of reasons why you’d want to introduce Payapps, to lower risk of human error, or in payment terms, so you don’t get ambushed by smash-and-grab adjudications. For finance directors, you’d probably want to do it so that you’ve got greater granularity and dashboard scrutiny when you integrate these systems with an ERP or other accounting systems. I think the drivers for why you do it, depending on who you are, what your function is, why wouldn’t you do it would be one of my questions. We’ve already talked about people coming into your organisation at junior level and maybe looking at things and going, “Sorry, that doesn’t talk to that part of your business?”
I think this is also about integrating systems as well as automating, and freeing up capacity. Quantity surveyors shouldn’t be compliance officers in terms of the Construction Act and lawyers like me don’t really add value to the built asset, so we should try and extract ourselves from the system and add value at the contract phase rather than dispute’s phase. I think the only way to take this forward is whether it’s because you’re the client and you want scrutiny over compliance, and you want a glass floor in your contracts so that you can monitor supply chain behaviour or whether you’re a CFO, Head of Legal, Director of Legal in a business, or Commercial Director, there are a number of different motivations.
I think having a digital tool that enables all that and streamlines the transaction online for both sides of the transaction takes a lot of the tension out of it, gives you the transparency to track and trace how the payment is progressing, and what both parties need to do to progress it.
