Construction firms can now sign up for the fair payment charter, but Wes Simmons, managing director of Eque2, says it’s already causing controversy.
HOW LONG IS IT?
You’ve probably considered the Construction Supply Chain Payment Charter, as have many other businesses. If your company has signed up for the voluntary scheme, you are obligated to pay your suppliers within 30 days beginning in January 2018. Needless to say, the fair payment charter has already sparked debate – and it was only introduced in April.
The fair payment charter, in my opinion, is a good thing. Despite reservations, it has the potential to benefit small businesses while also improving cash flow throughout supply chains. You, like many others, may be sceptical about the positive impact the fair payment charter will have on the construction industry, but there are numerous advantages to the charter.
Who’s up for the challenge?
To date, only a few large corporations have grasped this particular nettle. When the fair payment charter was launched, only nine of the Construction Leadership Council’s 30 members were able to commit to the voluntary charter. However, it is acknowledged that large businesses will need time to adjust their business models over the next few years.
How about me? I’m a SME.
According to the Construction Leadership Council, the charter demonstrates the organization’s commitment to small and medium-sized businesses and the critical role they play in the construction industry. However, there have been warnings that tier one contractors would need to seek alternative financing if they agreed to the new charter terms, while smaller companies may struggle to find this alternative at all.
Late payment often has a disproportionate impact on SMEs with limited resources. A small business, such as a plumbing subcontractor, will typically operate on a razor-thin profit margin. A payment delay of several weeks or months is frequently the final straw. The majority of small businesses fail due to a lack of funds.
The fair payment charter has raised concerns that it will raise general pricing in the industry or result in larger firms gaining a monopoly. It’s no surprise that small and medium-sized businesses are wary of the charter’s new terms.
That’s what you call fair?
So, yes, I believe it is. This charter, in its best aspects, is exactly what the industry requires. Giving the supply chain a jolt and hastening payment throughout the construction process. We’ve all encountered businesses that like to charge but hate to pay – and thus benefit no one but themselves. Suppliers who receive prompt payment are more likely to pay their own suppliers (in an ideal world – I’m a realist), and so on. If it works, it could help the economy keep moving forward.
Please lend us a tenner.
Finance firms are also hopeful that the fair payment charter will increase the flow of lending to construction companies. Many lenders consider construction to be high risk, and one of the risk factors is slow payment. Some specialist lenders have dedicated construction finance products, but others have simply withdrawn from the sector. By providing more certainty to payment terms, the charter may alleviate lender concerns and increase borrowing opportunities for construction companies.
Maintain the cash flow
The fair payment charter also outlines other commitments that will improve cash flow, which can only be a good thing, in my opinion. This includes not withholding or delaying payments or retentions. Any payments withheld will only be due to defects or non-deliverable work, all of which will be clearly outlined in the contract terms. This new approach, I believe, will improve the quality of work completed, benefiting both the supplier, the business, and the customer. Improved cash flow in supply chains will eventually allow companies to reinvest in other projects, contributing to the industry’s growth.
Is it affecting retention?
Retentions should be no problem if payments are fair, right? Retentions may be the bane of the construction industry, but are they truly that bad? They can actually be quite beneficial to business if properly controlled and managed, so if the fair payment charter takes off and your retentions are working in your favour, the scheme could be beneficial to contractors and project owners.
Are we all in this together?
Of course, none of this matters if no one signs up for the voluntary charter. To make the fair payment charter a reality, everyone must work together – clients, contractors, supply chain, and the government. So why don’t we start talking about it right now? It has the potential to benefit everyone, from the customer to the supplier to the developer, but only if we all work together.