Memorandum submitted by the Subsidence
Forum
EXECUTIVE SUMMARY
1. Until recently, the timeliness and effectiveness
of the payment process in the subsidence industry has not been
challenged. However, as suppliers become more discerning in their
choice of client, as a direct impact of the present construction
boom which will continue for most of the next decade, payments
issues become more critical.
2. A detailed analysis of the cost of the
problem does not exist. However assessment of the direct and indirect
costs of the current payments process against a backdrop of external
subsidence claims expenditure of £500 million (with all its
inadequacies) indicates cost as much as £15 million per annum,
or 3% of the total.
3. The paper suggests that good payment
terms and increased capacity in the subsidence marketplace go
hand in hand.
4. Poor payment terms coupled with reduced
margins will reduce the supply base, reducing competition and
further increasing claims costs (against a background of already
increasing cost due to the construction boom).
5. The paper looks at some of the payment
issues along the entire supply chain, and recommends a series
of short-term and medium-term proposals for improvement.
6. Importantly this is not an attempt simply
to improve the position of contractors in the supply chain. Whilst
in essence there is nothing wrong with this, the theme of the
"poor old contractor" not getting paid is not central
to this paper, rather that there is a need to match 21st century
processes with 21st century payment systems.
INTRODUCTION
7. Poor payment has traditionally been an
issue for the subsidence industry, but one which has not risen
to the surface. This is not to say that payment processes have
been satisfactory or indeed payment being made in a timely manner—simply
that it has not featured openly or been discussed openly as a
problem area.
8. The fact remains that payment problems
have been with the subsidence industry almost for as long as the
peril came into existence in the mid 1970's, over 30 years ago.
Those with longer industry experience will remember the demand
of insurers to be provided with full interim and payment reports
before releasing funds. These funds would be made either directly
to the insured, to a repairer or to an adjuster under a mandate.
Whichever option was adopted, a paper chase inevitably occurred.
9. This paper chase would usually initially
show itself in complaint calls to the adjuster, then leading to
occasional intimidation of the policyholder. This threat by contractors
tends to become more prominent as they vent their frustration
at not being able to get payments released in a timely manner.
10. In many cases slow payment to a repairer
would result in a last minute faxed reports to the claims office,
coupled with the famous promise "the cheque is in the post".
In the most extreme cases, the strength of the relationship between
the adjuster and insurer was such that an insurer would make a
payment based on a verbal request, to be backed up on paper at
a later date.
11. Thirty years ago, the industry was heavily
fragmented; nowadays it operates in an entirely different way,
through delegated authority arrangements with suppliers, framework
or term contract agreements, service level agreements (SLA's)
and the advent of supply management techniques. But for all these
changes, the payment process fundamentally remained as it was
30 years ago.
12. This report on behalf of the Subsidence
Forum as a whole has been created against a backdrop of a different
construction environment which places even greater focus on the
need for better payment systems. The construction market is more
buoyant than existed before in the history of subsidence. The
approaching 2012 Olympics, Thames Gateway development and general
building boom increasingly lead to suppliers being more discerning
as to who they work for.
13. Payment terms are becoming as important
as profit margins. Repairers were prepared to tolerate poor payment
terms provided the work was adequately profitable, but that profitability
has evaporated with the advent of supply management techniques,
greater transparency and the leveraging of commercial relationships
to create claims cost savings. Profit margins in the insurance
sector have been reduced by the professional procurement of services,
but also go hand in hand with prompt payments terms—which
have not always been delivered as promised.
14. When coupled with poor profitability,
against a background of other more profitable, less onerous repair
sectors such as public sector regeneration, the problem of late
payment becomes a real disincentive for the supplier base to work
for insurers. This creates a problem for the present and also
builds a problem for the future.
A BUOYANT CONSTRUCTION
MARKETPLACE
15. The BCIS Construction Briefing in April
2006 concluded:
— Materials costs rose 2.1% in the
year to 4th quarter 2005, yet nationally agreed wage rates rose
by 5.4% in the same period.
— Materials prices are likely to rise
at around the rate of inflation over the next year.
— Wage settlements are already expected
to be agreed above the rate of inflation for 2006.
— New orders for construction rose
by 6% in the 4th quarter of 2005, compared with the previous quarter,
and 11% compared with the same quarter a year earlier.
These independent figures clearly indicate a
buoyant construction market, confident in short term future workload,
with a shortage of skilled labour driving increased construction
costs. There is no likelihood of the position changing in the
short or mid term future.
PAYMENT IN
THE WIDER
CONSTRUCTION INDUSTRY
16. Subsidence is simply an element of the
construction industry which in itself is plagued with a poor payment
record.
17. A similar survey by the National Association
of Specialist Contractors confirmed that construction specialists
continue to wait for payment:
— Half are paid up to 1 month late.
— Third are paid extremely late (1
month plus).
— 70% say they are never paid on time.
Domestic customers, local authorities and councils
are reported to be the best payers.
Larger or main contractors are considered the
worst payers.
The smaller the company, the quicker the payment
is received:
— 22% of larger companies (turnover
of over £5 million wait for 60 days plus);
— compared with just 7% of smaller
companies.
However, the failures of the UK construction
industry as a whole cannot justify inadequacies within the insurance
sector. Two "wrongs" never ever make a "right".
ASUC SURVEY
18. Albeit based on a relatively small survey
sample, The Association of Specialist Underpinning Contractors
(ASUC) undertook a survey of members. This indicated that the
greatest payment issues arose where intermediaries—adjusters
and project managers—were involved. (Appendix A)
19. It is important to recognise that this
may not represent the industry as a whole and that others may
have much more favourable experience of reimbursement.
LATE PAYMENT—HOW
BIG IS
THE PROBLEM?
20. To date, no independent assessment has
ever been carried out to identify the direct and indirect cost
of poor payments in the subsidence sector.
21. Some organisations mandate payments
directly from insurers to contractors and, barring the very odd
exception of "human error" or where, for example, e-mails
have gone astray etc, one of the biggest delays in certifying
payments results from contractors presentation of unsubstantiated
claims for additional works; poorly presented interim accounts,
or the like.
22. Whilst this clearly does not apply to
all, and many do a great job, it seems to be that contractors
can very often be their own worst enemies when it comes to the
certification and receipt of prompt payments. These, along with
the important responsibilities of the contract administrator,
are critical factors.
23. Supplier organisations are already considering
a best practice document for their members to ensure the contractors
"do their bit" around agreeing valuations, variations
and timing of interim applications.
24. In a world of "home workers"
and call centres it is often difficult to have direct conversations
with adjustor regarding variations and the like whilst work is
in progress on site.
25. It is suggested that if the original
specifications are more accurately prepared with a 10-15% contingency
then the contractors could be within budget without recourse back
to an adjustor—this of course requires confidence and adequate
controls down the supply chain to allow contractors to spend the
contingency within a set of given parameters.
Poor payment process appears not only to irritate
but to add cost to the process. These costs fall into two distinct
categories:
— the direct costs of managing the
existing payment process; and
— secondly the "knock on effects"
of suppliers choosing to work in other sectors as a direct result
of poor payment.
DIRECT COSTS
FROM POOR
PAYMENT PROCESS
26. The starting point is probably to consider
the number of payment applications for subsidence related work
in any given year, and the physical cost of this process.
27. Figures are uncertain, but if in a "normal
year" of say 30,000 cases 50% are repudiated that leaves
15,000 cases each with at least one maybe two payment reports.
Taking the worst case scenario that equates to 30,000 payments
reports pa. Assuming that each payment report takes 30 minutes
for the repairer to generate, 30 minutes for the adjuster to check
and generate a report, and 15 minutes to process by the insurer,
over 37,500 man hours per year are involved.
28. Assuming a fully loaded cost of say
£50 ph, this equates to a cost of creating valuations and
processing payments in the order of £1.9 million per annum.
29. Of the 30,000 cases there may be a particular
problem with 1% requiring an additional resource of a further
one hour making a further cost of £1.5 million.
30. Added to this is the cost of payment
reconciliation issues—comprising the cost of sorting out
whether a direct payment to a contractor has been made, or not.
Again, figures are vague but across the industry a figure of £1
million per annum might not be considered unrealistic.
31. The total "direct cost" of
valuation generation and payment processing is of the order of
£ 4.4 million.
INDIRECT COSTS
FROM POOR
PAYMENT PROCESSES
32. These fall into two categories:
— the cost of adverse cash flow; and
— the poor payment effect on encouraging
suppliers to enter the subsidence industry.
Adverse cash flow
33. Indirect costs relate to the cost of
adverse cash flow. In any year, against industry spend of £500
million, say 30% (£150 million) of this is delayed beyond
30 days, to 90 or even 120 days. The aggregate cost of this to
the supplier base in terms of overdraft facility may be as much
as £5 million per annum.
34. There is anecdotal evidence that some
banks supporting contractors, who have traditionally granted overdraft
facilities on the back of "safe" insurance funded works,
are now beginning to change their opinion and advising their clients
to withdraw from this market unless cash flow can be improved.
Disincentive to Enter the Sector
35. At a time of construction boom, suppliers
are becoming more discerning as to who they adopt as clients.
There is a clear pattern of suppliers exiting the subsidence market.
Coupled with consolidation, the supply/demand imbalance is increasingly
taking effect as the competitive environment reduces.
36. For example, engineering firms, builders
and specialists are increasingly focused on new build. Exceptions
naturally exist, namely those organisations which are locked into
the industry with little chance of escape. However these "locked
in suppliers" do not constitute the majority of insurer expenditure,
which rests with the building repairers themselves.
37. The advent of repairer networks whilst
reducing supplier management costs may in some areas be actually
adding cost to the process. The Office of Government and Commerce
(OGC) asked the question in their publication "Smaller supplier,
Better Value"? It is beyond the scope of this report to debate
supplier management issues but until the subsidence industry is
able to attract new entrants through improved payment terms, the
industry will need to depend on the present or perhaps even fewer
incumbents.
38. Suffice it to say that with less choice,
distortions in the supplier base and the lack of competition may
be leading to increased repair costs of possibly as much as 1%,
or £5 million per annum.
39. Even recognising the "guesstimation"
which has occurred in these calculations, a case can be argued
for poor payment process directly and indirectly costing the subsidence
industry in total as much as £15 million per annum.
PRODUCTIVITY AND
PRIORITISATION
40. At first sight it is easy to blame the
insurer, intermediary or the individuals involved. However it
is important to consider the causes, rather than the symptoms.
Productivity
41. The increasing effect of commoditisation
within subsidence has directly lead to suppliers needing to operate
at a high level of productivity, to meet:
— the financial needs and demands of
their ownership structure;
— the need for profitability within
limited remuneration rates; and
— to comply with client requirements
to meet contracted service levels, even if this means inefficient
working practices.
42. As a result, the individual workloads
of intermediaries are at a high level, albeit this figure can
be disguised by the breaking of the caseload into segments. This
also may reflect on customer service, and the problem heightens
when there is a surge of work—when existing resources "stretch"
to meet increased new losses (sometime at the risk of reducing
attention on work in progress).
Prioritisation
43. At the same time, there appears to be
an absence of requirement—either implied or contractual—to
deal with payment issues in a timely manner.
44. As a result, payment issues do not receive
full attention as they have low priority. In fact payments may
only be dealt with by the individual to avoid supplier complaint
which has an even greater disruptive effect.
45. In an environment of service levels,
there are few controls around the speed of the payment process
mid claim. Where controls do exist, they are seldom adequately
policed.
THE ROLE
OF THE
INSURER
46. Under ICOB 7 for Retail customers, insurers
are required to endeavour to make payments within five business
days. For commercial customers it is within a reasonable period
but most insurers try to adopt the five business days as a model.
They get round this on the larger commercial cases by making electronic
payments. Most large insurers have central payment teams for suppliers
and there is no reason why they should not adopt the five business
days model for them as they do so for customers.
47. There is no evidence that insurers deliberately
withhold payment. Indeed most insurers simply see the payment
process as just that—a "process" within the overall
claims system. (There is anecdotal evidence of one insurer imposing
a delay of a month or more in making payment to third parties
which seems to cause problems for other insurers and their suppliers
such as solicitors and adjusters, but that in itself appears to
be a deliberately managed matter and capable of change.)
48. For insurers, the fewer touches, the
less work, the better for their operational effectiveness provided
of course that adequate controls are in place to ensure that valuations
are correctly stated and properly "signed off".
49. Insurers could however ensure as part
of their procurement process that all parties in their supply
chain have an adequate payment process in place and audit the
efficiency of such a process.
50. E-payments are being considered by insurers
and are certainly more efficient. Suppliers can ask for such a
facility in negotiating contracts. Some insurers comment that
e-payment is perhaps no quicker than the cheque payment system—easier
for the recipient but not perhaps any faster to issue by the insurer.
(Perhaps electronic systems as they currently operate are not
in fact the panacea.)
51. An increased move to delegated authorities
can help the payment process provided that the insurer has a good
payment team that is not overloaded.
52. No insurer trusts its adjuster or engineer
enough to give direct access to their payments system but some
do provide advance funds to adjusters to speed up the payments
process. This may be a useful way forward which might be capable
of further exploration.
53. Whilst the importance of cash flow to
contractors is fully acknowledged, they are not alone in such
problems. Commercial constraints are often presented by the business
terms required by some insurers of their intermediaries and loss
adjusters. Typically these include no interim fees payments on
lengthy claims; performance related fee structures bordering on
penalty terms; consolidated invoicing arrangements which then
take additional lengthy time to pay; requirements for service
providers to share insurers risks; and commercial arrangements
based upon predicted volumes of business which then, for whatever
reason, do not then materialise.
54. There can be no doubt that he who pays
the piper calls the tune . . . but of course it is important to
pay the piper in a timely manner.
THE INTERMEDIARY
AS FUND
HOLDER OR
DISTRIBUTOR
55. In some situations there is evidence
of intermediaries acting as fund holders or distributor whereby
insurers' money is paid to the intermediary—perhaps under
a mandate—and then passed on to the repairer.
56. Problems often occur:
— The intermediary may derive financial
benefit from not passing money promptly onto the supplier who
may feel in such a vulnerable position as not to be able to complain
(but may withdraw future services).
— The intermediaries' own systems may
not exhibit adequate controls to ensure payment is promptly made.
57. This is often seen to happen where the
intermediary operates a network, receiving a commission for the
management of that network. The intermediary may consider that
the only sure way of obtaining the commission is through deduction
"at source".
58. One member of the Subsidence Forum suggested
the worse payers are contractors to subcontractors, and that they
ought to lead by example!
THE ROLE
OF THE
SUPPLIER—NEVER
AT FAULT?
59. There is a tendency for suppliers to
think that the payment problem may entirely be of the insurers
making, or their intermediary. This is not so.
60. Incorrect references may result in cases
being difficult to track. Poor valuations of work, perhaps presented
on a speculative basis may be rejected.
61. Requests for payments "on account"
for work not yet carried out (because of an anticipated delay
in payment) may be unsustainable, apart from the fact that few
construction trades elsewhere are actually paid for work they
have yet to do.
62. The suppliers own systems may be inadequate
to ensure that payments received are properly recorded.
63. Suppliers need to learn to follow the
clearly defined payment systems required by supply chain teams
and work with their principals.
64. This situation is heightened when a
payment is made with an incorrect or perhaps no reference, or
for the incorrect amount (net of the policy excess for example,
or as a part payment against a larger sum).
65. Particular focus is likely to be placed
on adjusters and intermediaries who particularly may need to work
smarter. The subject of payment is gaining momentum and will become
increasingly important in competitive tenders.
66. Adjusters increasingly need to show
that they can reduce the life of the claim.
67. Lengthy, long outstanding claims cost
more money and all insurers are keen to reduce costs!
THE ROLL
OF THE
SUBSIDENCE FORUM
TO IMPROVE
MATTERS
68. At the end of the day, insurers are
driving costs and performance but suppliers have a choice—to
adapt, or to exit. Perhaps this paper might have alternatively
been entitled "If you can't stand the heat . . ."
69. The issue here though is that for some
suppliers, leaving the sector may not be an option ie subsidence
specialist loss adjusters. For that reason, the Subsidence Forum
seeks to improve the status quo rather than recommending an exit
strategy to the disenchanted.
70. The reality of the situation must also
be recognized in that every insurer is always going to drive the
"deal" which they believe delivers the maximum benefit
to their customers and shareholders, and everybody else in the
supply chain has the choice to participate or not, as they see
fit, on the terms being offered.
There are simply "market forces" at
play here. Whilst the current construction boom might mean that
things will have to be improved industry wide, this will only
happen as and when the market dictates such changes as being beneficial.
There is an obligation on the Forum at least to raise awareness.
71. It has been suggested that the payment
problem relates more to the companies that are not actively involved
with the Subsidence Forum rather than those that are. That is
not to say that with the larger companies problems do occur from
time to time—but in the main the larger companies seem to
have systems to make payments promptly.
72. The challenge for the Forum as to how
to influence those smaller companies that are failing is a real
challenge and not one that the Forum recognizes it will be able
to achieve in the short term, but one which is nevertheless possible.
CHANGE IS
POSSIBLE
73. Against this backdrop, some observers
may suggest that the process is so ingrained as to make change
impossible. This is not accepted by the Forum.
74. Some 25 years ago, the process of "retentions"
was commonly a part of the subsidence process. (A retention is
an amount of money held by the client against the discovery of
defects)
75. Retentions are also a problem area for
the general construction industry. In a survey by NSCC they report
76. At any time, an estimated £680
million is being held in retentions within the construction industry
(a) 54% of respondents fail to recover 20%
of their retentions.
(b) 10% fail to recover 80% of their retention.
(c) Despite the use of retentions to rectify
defects, almost 80% of respondents are not required to return
and rectify defects.
77. Retentions are not commonly used in
the subsidence industry, and have been increasingly replaced by
defects insurance guarantees. The reasons for the movement away
from retentions were principally that:
— Framework agreements between insurers
and repairers placed a commercial obligation on the repairer to
return and complete poor work.
— The adjuster or intermediary had
no desire to keep the file open and delay submitting a fee.
— The insurer equally had no desire
to keep the file open.
78. Payment of the retention to the policyholder
to be passed on in six months was met with problems, in that the
policyholder would often conveniently find defects which prevented
the retention money being passed on.
79. The repairer saw the release of the
retention as being a "bonus"—in that there was
a low expectation of its release and profitability did not depend
on it.
80. Although the reason for the removal
of retentions is multiple and partly complex, and the practice
of retentions remain in the wider construction market, this example
gives hope to the fact that the current payment process is capable
of modification.
21ST CENTURY
CLAIMS, 20TH
CENTURY PAYMENT
PROCESS
81. The past five years have seen an increasing
trend of standardisation of the subsidence process, following
the model of Egan and Latham.
82. All the key targets for improvement
have been met or exceeded, without compromising commercial advantage
or diluting competition. Indeed success has gone to those firms
which have been able to provide effective, compliant products
at low cost, whilst at the same time differentiating themselves
through adding value.
83. The Subsidence Forum support the sentiments
of the NSCC Chairman, who said
84. "The timely movement of money through
the supply chain is fundamental not only to enable specialists
to invest and innovate, but in many cases to survive and for the
client to enjoy the true benefits of integration".
85. "Good payment practices must become
the norm and we must continue to address payment practices within
our industry, if we are to increase investment in training, manage
health and safety more effectively, and deliver quality products".
86. 2007 brings two new features to the
subsidence template:
— Increased capacity in the market.
— Better payment processes.
87. The two elements go hand in hand in
that as payment terms and processes improve, there is less likely
to be losses of traders from the sector, in fact there may be
new entrants. This healthy position will increase competition,
controlling claims costs and driving up standards.
NEXT STEPS
88. The Forum proposes a three stage process.
89. Raising of awareness not only of the
issues but of the consequences.
90. Through the Forum's links with CILA
and the Subsidence Special Interest Group their chairman has agreed
to approach all loss adjustors for facts and figures regarding
the payment issues covering:
(c) How many average payments per claim.
(d) Timescales adjustors work to regarding
payments.
91. Better information on current payment
issues, to allow improved understanding of the scale of the problem,
and also to ensure that there is a benchmark against which to
measure improvement.
92. A further report by the end of Quarter
3 2007 which proposes key action points including the results
of the CILA survey above.
Interim Activities
93. Attention to detail—It has been
suggested that many of the problems rest in the simple things—poor
or no references. Suppliers particularly are encouraged to pay
attention to detail in that regard.
94. Documented payment processes—Organisations
should as a matter of course have documented processes which identify
the payment workflow. These should be up-to-date, and shared along
the supply chain.
95. Procurement documentation—Bid
documents should make reference to payment processes, and use
these in part as a measure of the evaluation of a suppliers suitability.
96. Audit processes—Internal and external
audit should review compliance with payment service levels.
Medium Term Activities
97. The direct and indirect cost of poor
payments is indicated to cost the subsidence industry perhaps
£15m, or 3% of total insurer spend in an average year, based
on £500m total expenditure.
98. Increasing pressures on insurers will
inevitably encourage them to look for improvements in effectiveness,
part of which may come directly and indirectly from payment processes
and terms of payment.
99. Increased and demonstrable progress
in this area will encourage new entrants to the subsidence marketplace,
improving sector capacity and competitiveness.
100. It is inevitable that future payment
processes will be both standardised and electronically based,
at least in part. Consideration should be given to the encouragement
of innovation in this specific area, recognising that the cost
benefit of slicker payment would substantially outweigh other
areas of innovation interest.
SUMMARY
101. Introducing modern payment processes
into the subsidence arena is not going to be easy. It is a complicated
and sensitive area—after all we are considering a series
of different services and supplier types, not widgets.
102. Pressures on insurers will continue
to increase as we approach the end of the decade, and insurers
will want to look carefully at all the options available to them.
Claims departments which sometimes suffocate under paper driven
systems may find e-invoicing a blessing, making the process easier
to manage, and free people up to concentrate on strategic business
areas such as service delivery and continuous improvement.
103. It is unlikely that e-invoicing will
be developed in isolation, but rather be accompanied by electronic
tendering, and electronic contract management. This will lead
to secondary effects. The advent of "electronic tendering"
is likely to slash the cost of procurement, and the cost of handling
numerous tenders and responses, which will in the future be more
easily compared. The effect of this may be to reduce the duration
of term contracts, or perhaps remove them entirely.
104. Electronic tendering will come hand
in hand with electronic contract management—enhancing the
management and performance monitoring of a larger number of suppliers.
Information will be able to be accessed quickly, electronic audit
trails will established and performance management will go through
a step change of improvement. Inevitably some will be concerned
that electronic invoicing, coupled with electronic tendering and
contract management will damage the quality of services, but this
is not the experience of the public sector and of those organisations
which have successfully challenged the status quo (such as Kent
County Council).
105. But if the future of payment processes
rests in electronic systems, at present no insurers or suppliers
in the subsidence sector use such a method to its fullest extent.
But interest is growing within procurement professionals who have
successfully used such techniques in different sectors.
106. Now may be the time to start to explore
how electronic systems can make the process simpler, and in doing
so release valuable funds to improve the claims loss ratio. Future
pressures on the residential insurance market will increasingly
make a 3% saving in claims cost worth having—and squeezing
the supplier is unlikely to be a viable strategy.
107. A 21st Century claims service requires
a 21st Century payment process.
APPENDIX
| Client Base |
Approx payment period (in days) |
| | 0-30
| 30-60 | 60-90 |
90+ |
| 1 | Employed by Local Authorities
| 3 | 6 | |
|
| 2 | Employed by home owners (non-insurance)
| 7 | 2 | |
|
| 3 | Employed by main contractors (insurance related)
| | 7 | 2 |
|
| 4 | Employed by main contractors (non-insurance)
| 1 | 8 | |
|
| 5 | Where employed directly by Insurance Companies
| 1 | 2 | 2 |
2 |
| 6 | Where employed by home owners who have a professional advisor acting for them ie Engineers or Surveyors with an intermediary Loss Adjusting Practice involved
| 1 | 1 | 4 |
3 |
| 7 | Where employed by Insurance Company appointed Project Managers
| | 3 | 1.5 |
4.5 |
ASUC report 2007—Payments in the Underpinning Sector
June 2007
| 
