The UK construction industry in my experience is a terrible one for payment. Some of the records of payment terms are worse than archaic. Is there a worse industry around I wonder?
Why do we expect the next guy down the chain to basically fund the next guy up the chain? Can you imagine popping into your local supermarket, taking the goods and commenting you will probably pay some time in the next 100 days or so if they are lucky - unlikely (if you want to avoid arrest), but that is basically quite often how we operate.
The UK government is trying to address this and has a very noble aim (through the Fair Payment initiative) to get monies from clients all the way down to tier 3 all within 30 days of an assessment date. Of course it can be achieved, there is simply no reason at all why not. Cut through most beaurocratic processes and paying becomes straightforward. There is of course the facility of a project bank account on the right sized job, such a provision can be found on http://www.neccontract.com/.
Anyway, all of this still promotes a negative cash flow running through the supply chain. So why not conisder flipping this over and promoting positive cash flow contracts - guess what, these are usually quite a bit cheaper than the negative cash flow contract as the seller(s) no longer funds/charges the chain above.
In the NEC3 Engineering and Construction Contract (ECC) there is secondary Option X14 Advanced payment to the Contractor. Decide the amount of advance payment to be made (within 4 weeks of the Contract Date), get an advanced payment bond, decide over how many months the Contractor repays the amount and away you go.
In the private sector, ask tenderers at tender stage to price with/without the advanced payment (make it a very reasonable amount) - if you decide the saving is worth doing then go for it.
In the public sector there is some work to do. The rules are different, it appears, in that goods, works or services should not be paid for before receiving them - this surely is nonesense. This is one rule (as a UK taxpayer) I would love to change - why on earth should this rule exist, actually does anyone know precisely where it does exist?! If I can get things x% cheaper as a taxpayer with the slight risk associated, wouldn't this mean I get more bangs for my buck, isn't that best value? When Latham/Egan said we were inefficient, there was waste in the system, then surely the simple consideration of equitable payment terms can make a huge difference?
What do you think?
Rob
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I was researching this for a client and found a HM Treasury report entitled "Managing Public Money". Hidden deep in one of the annexes (http://www.hm-treasury.gov.uk/d/mpm_annex4.6.pdf) it says "advance payments to contractors should be exceptional, and should only be considered if a good value for money case can be made for
ReplyDeletethem". The report then goes on to explain why "as advance payments lead to higher Exchequer financing costs, such payments are novel
and contentious and usually require specific Treasury approval".
So the rationale appears to be more about the macro economic picture (not adding to the Public Sector Net Cash Requirement) than it is about risk.
When looking at this surely you need to offset any savings offered against the cost of borrowing in order to make a proper judgement on best value?
Neil