You can’t fail to be aware of the debate going on in the media (social and hard copy) as a result of the announcement from Carillion that it was going to extend its payment terms for subcontractors to 120 days.
Buy why does it matter so much?
Cashflow is King
As far back as 1973, the construction industry recognised the need for cashflow within the network of companies working on a project.
The Court of Appeal decision in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd, contains this famous quote from the respected Lord Denning MR:
“When the main contractor has received the sums due to the sub-contractors certified or contained in the architect’s certificate – the main contractor must pay those sums to the sub-contractor. He cannot hold them up so as to satisfy his cross-claims. Those must be dealt with separately in appropriate proceedings for the purpose. This is in accord with the needs of business. There must be a ‘cash flow’ in the building trade. It is the very lifeblood of the enterprise. The sub-contractor has to expend money on steel work and labour. He is out of pocket. He probably has an overdraft at the bank. He cannot go on unless he is paid for what he does as he does it. The main contractor is in a like position. He has to pay his men and buy his materials. He has to pay the sub-contractors. He has to have cash from the employers; otherwise he will not be able to carry on. So once the architect gives his certificates, they must be honoured all down the line. The employer must pay the main contractor; the main contractor must pay the subcontractor, and so forth.”*
Skipping ahead to 1994, Sir Michael Latham’s Report, ‘Constructing the Team’, proposed essential terms for a modern effective contract (paragraph 5.18 (11)) including:
“…speedy dispute resolution if any conflict arises, by a pre-determined impartial adjudicator/ referee/ expert.”
“Clearly setting out the period within which interim payments must be made to all participants in the process, failing which they will have an automatic right to compensation, involving payment of interest at a sufficiently heavy rate to deter slow payment.”
The 2002 successor report to the 1998 Egan report, Accelerating Change (paragraph 5.24) noted:
“Lengthy payment periods and delays in payments severely damage construction businesses, especially small and medium sized firms. In a relationship of collective responsibility, responsible behaviour and mutual interest, as characterised by integrated teams, payment delays and retentions cease to be a significant issue. By striving to integrate the team, the industry has the opportunity to tackle a major problem that has dogged small and medium sized companies for many years.”
The 2008 Report from the Business and Enterprise Committee ‘Construction Matters’ Report reflected the cashflow cascade:
“The hierarchical structure of most industry supply chains means that payment tends to flow from the client to the main contractor, who then pays the project’s sub-contractors, who in turn pay their own sub-contractors. Both the …the National Specialist Contractors’ Council (NSCC) and the SEC Group…told us there remains a “deep-seated culture among main contractors of delaying, reducing or simply avoiding payment to their sub-contractors”. At worst, poor payment practice can lead to firms’ insolvencies.”
Construction Matters went to recommend the adoption of the Fair Payment Charter which commits the supply chain to “greater transparency; more efficient payment processes; and payment periods not exceeding 30 days”.
Until the Housing Grants, Construction and Regeneration Act 1996 (HGCRA), there were no statutory controls on the rights or duties of the parties on a construction project (unlike Civil Law countries where these rights were codified). Standard forms were used to ensure consistency and to set common standards and expectations. The aim of the HGCRA 1996 was a clear and fair payment regime and that Act introduced powers to enforce it. It also introduced adjudication, as the form of speedy dispute resolution mentioned above.
This Act was recently amended by the Local Democracy Economic Development and Construction Act 2009 (LDEDCA). One of the aims of the LDEDCA was to increase transparency and clarity between the parties to a construction contract.
The Construction Acts imply terms into construction contracts to improve the transparency of the payment process as well as setting out default provisions if the parties to a contract do not make suitable arrangements. The minimum requirements of the Acts are set out in my handy Guide.
Late payment, as well as providing a remedy for the unpaid by being able to suspend any or all of the works on a construction contract under the Construction Acts, has other remedies attached. The Late Payment of Commercial Debts (Interest) Act 1998 introduced the payment of interest on overdue payment at 8% above the statutory base rate. The legislation was amended by Regulations in 2002, and since in 2013, to permit the recovery of the costs of getting interest paid by the payee and to introduce payment periods of 30 days for private sector companies. For more information see Pay on time or Else?
As I said in my comment on the original Building article “Is it right that one company should decide to use its market position and the current economic climate to undermine years of progress on fair payment, cashflow, working with the supply chain? Since 1994 we have been working towards fairer payment and this is a body blow to the industry.”
My purpose in this blog was to set the scene for the last sentence above. What do you think?
* See (1973) 71 LGR 162 , 167.