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MEMORANDUM SUBMITTED BY THE
SPECIALIST ENGINEERING
PART 8, LOCAL DEMOCRACY, ECONOMIC DEVELOPMENT AND CONSTRUCTION BILL
1. Part 8 of the Bill -
dealing with construction contracts - now has to be viewed in light of the
current economic situation in the construction industry. Traditionally the impact of recession upon
the construction sector is far worse than upon any other sector of
industry. The current recession is no
exception. 2. Recently Begbies Traynor
(business recovery specialists) reported that construction firms suffering
financial problems increased by 126% in the first quarter of 2009 compared with
a year earlier. These figures were
echoed in recent figures produced by the industry publication, Contract Journal, which show that
County Court Judgments in the industry have shot up by 55% over the past
year. Pricewaterhouse Coopers have
reported that nine construction firms are going into insolvency each day. Insolvencies in the first quarter of this
year in the industry have increased by 50% over the same period last year. In manufacturing the comparable figure was
23%. 3. The impact upon jobs in
the industry is devastating. The Royal
Institution of Chartered Surveyors has indicated that the industry could lose
at least 300,000 jobs in the current recession.
This could be a conservative figure since the industry shed half a
million jobs in the last recession. 4. As always the greatest
impact of the recession falls on smaller businesses which make up the vast
majority of firms in the industry.
Ninety percent of firms in the industry are sub-contractors which
deliver most of the industry's turnover.
Insolvencies up the supply chain, poor payment practices and contractual
abuse significantly add to the woes of these firms. 5. The tragedy is that when
firms go bust the consequent loss of jobs will result in significant labour and
skills shortages that will impact upon the government's plans to build
hospitals and schools and renew and refurbish ailing infrastructure. 6. Part 8 of the Local
Democracy, Economic Development and Construction Bill offers Parliament the
opportunity to improve security of payment for small firms in the industry once
and for all. This is an opportunity that
should not be missed. 7. Part 8 comprises the government's
amendments to Part 2 of the Housing, Grants, Construction and Regeneration Act,
generally known in the construction industry as the Construction Act. Whilst the government's amendments are on the
right track, the Specialist Engineering Contractors Group has concerns about
the approach adopted and also concerns relating to measures which have been
omitted. 8. Dealing with payment first. The key provisions are clauses 139 and
140. These aim to ensure that, by the
final date for payment, there is a defined amount that has to be paid. This was the original aim of the Construction
Act but its provisions did not quite achieve that. Whilst the government's amendments do achieve
this, we have grave reservations about the approach adopted. Before we set out those reservations we
should make clear that whatever we do in improving these amendments, they will
not remove the inequality that exists in the construction industry between the
payer and the payee. Once the work has
been done or the service provided, there is nothing that can be done to retrieve
that work and/service if there is late or non-payment. This is why, almost 15 years ago, Sir Michael
Latham in his report, Constructing the
Team, recommended statutory trust funds as a way of protecting cash flow
for the supply chain. Unfortunately,
this was never implemented. On the other
hand many countries in Europe, the 9. Against this background
we come back to clauses 139 and 140. The
effect of these clauses will be to enable a payer to issue a notice to the
payee telling the payee the amount he will receive. Whilst this is, in itself, unusual there is a
further twist. The payer can reduce the
amount in his original notice which could be done many weeks after the initial
notice has been sent. The payee is not
given any statutory right to influence the amount he will be paid at the final
date for payment other than, subsequently, challenging the amount in
adjudication or in the Courts. 10. These provisions have not
received universal acclaim in the industry.
The Royal Institution of Chartered Surveyors said that the provisions
are "extremely complicated" and "unlikely to be understood by users in the
industry". The Chartered Institute
of Building has said that "the Bill is
overly complicated and unworkable in relation to the revised payment
provisions, which may result in higher administration costs, delayed payments
and unintentionally more adjudication". The
Federation of Small Businesses has also voiced its concerns. The Specialist Engineering Contractors' Group
representing a sector of over 60,000 firms in the industry says that its firms
are opposed to these provisions. 11. These concerns are
understandable. If a payer can issue the
initial notice and then have a second bite of the cherry by issuing a second
notice, the amount in the first notice will simply be indicative. If the payer begins to run short of cash in
the meantime, he could use the second notice to substantially reduce the first
initial amount. The amount in the second
notice is the amount which, then, becomes due.
Moreover, the second notice could be issued 60 or 90 days (or even
longer) after the first notice. HOW CAN A SMALL BUSINESS MANAGE ITS CASH
FLOW, PUT UP A GOOD CASE TO ITS BANK WHEN BORROWING MONEY OR BE SURE OF PAYING
ITS EMPLOYEES WHEN FACED WITH THIS SCENARIO? 12. We urge that the Committee
re-visits this provision. Essentially,
all that needs to be done is as follows: (a) The payee issues the
initial notice [within 5 days of the due payment date which is already in the
Bill]; (b) The payer issues a
notice in response and sets out the reasons for any difference in amounts
between his notice and the payee's initial notice; (c) Since there is
already a time limit on when the payee should issue his notice, there should
also be a time limit on when the payer issues his notice; we suggest that the notice is issued within
14 days of the due payment date; (d) The due amount should
be the amount in the payer's initial notice (if there has been no response from
the payer) or the amount in any subsequent notice from the payer provided that
notice fully sets out the reasons for the difference in amounts. 13. This approach is very easy
to follow and substantially reduces the unnecessary complexity in the current
provisions in the Bill. This procedure
reflects the procedure in the New Zealand Construction Contract Act 2002 which is
working very effectively. 14. We welcome the provision
in clause 138 (determination of payments due) which seeks to outlaw all
conditional payment provisions. There
are some drafting difficulties with the clause since there is a possibility
that the clause may not catch pay-when-certified provisions - which is the
primary function of this clause. The
Minister's officials have been informed of these difficulties and are, at
present, looking at them. We await the
outcome of their deliberations. 15. Clause 138 does not refer
to pay-when-paid provisions which are, with one exception, outlawed by section
113. The exception in section 113 is
that a pay-when-paid provision can still be relied upon by, for example, a main
contractor in the event that his client or customer goes into insolvency. In other words a sub-contractor will not get
paid at all in the event that the main contractor does not receive anything
from his client or customer. This is an
extraordinary provision and we cannot understand the reason why the Minister
has not removed this given that he is now seeking to outlaw conditional payment
provisions generally. The (then) DTI
consulted the industry in 2005 on removing this exception. A large majority of respondents requested
this removal. Why should SMEs act as insurers in respect of both the main contractor's
insolvency and the client's insolvency? Sub-contractors
will not be able to impose a similar provision on their suppliers of goods and materials
since pure supply contracts do not come within the legislation. Moreover, assuming that the SME can obtain
credit insurance, he cannot avail himself of such policy in respect of a debtor
who is once removed from him. So, there
is no way in which the SME can accommodate this risk. 16. The Minister has argued
that this provision was the subject of a compromise when the Construction Act
was introduced. The truth is that the
(then) DOE decided to impose this provision but, at the same time, agreed that
there should be a full review of insolvency law and practice as applied to the
construction industry. That review was
never instigated. Therefore, since one
half of this "compromise" was not delivered, the Minister cannot continue to
rely upon it. Furthermore, if the
Minister is not prepared to act on this, why was the matter allowed to go to consultation? We now urge the Minister to now remove this
exemption. 17. Whilst on the topical
issue of insolvency, there are two other matters we wish to take up. (a) The first concerns
clause 140(10). This provides that, if
the payer becomes obliged to make payment to the payee, he does not need to
make such payment if the payee becomes insolvent after the final date for
payment. This will only operate if the
contract so provides. This has been
inserted by BERR (not at the behest to the industry) following a case - Melville Dundas (in Receivership) v Wimpey
UK Ltd - decided by the House of Lords in 2007.
A bare majority in the House of Lords seemed to allow a contract to
override the clear provisions of the Construction Act which, in these
circumstances, would have made the payer pay the monies that had already become
due. The appropriate response to this
should have been to have an amendment that made clear that the statute is not
overridden by contracts. More importantly, we are concerned that
there is an unintended consequence of this amendment. It will simply encourage the payer to delay
due payments in the hope or expectation that the payee will go into insolvency. We cannot agree with this. (b) There exists in the Construction Act a statutory right to suspend one's contract in the event of late or non-payment. Whilst we welcome the Minister's proposal to strengthen this right of suspension in clause 141 (by providing the payee for compensation for the period of suspension), we suggest that further strengthening is needed. Given that payment periods are now increasing in the industry so that periods such as 90 or 120 days are now more common, the payee is increasingly put at risk of the payer's insolvency over these lengthy credit periods. There's little point in having the statutory right to suspend one's contract at the end of 120 days when after 60 days the payer has gone into insolvency. We would like the Minister to agree to an additional provision in this Bill that gives a right to firms to request adequate security for payment of the contract price including the price of varied or additional work. The payee should have the right to request the payer to provide a bank guarantee or payment bond that will give him some comfort that he will be paid at the end of the 120 days. Failure by the payer to provide such security would give the payee the right to suspend his contract there and then. In essence such statutory right would be no different from the current practice in the industry of the payer insisting upon the payee providing performance bonds or retentions as security for non-performance. We find it quite extraordinary that firms commissioning millions of pounds worth of work can be £100 development companies or companies - which is often the case in the industry - having liabilities far exceeding their assets. There is little point in Parliament providing payment protection when such protection is rendered meaningless by the impecuniosity of the paying party.
18. Finally,
adjudication. Whilst we generally
welcome the Minister's changes in relation to adjudication they need to go
further, particularly in one respect.
Many small businesses in the industry are becoming concerned at the
increasing cost of adjudication. When
introduced in the Construction Act it was intended as a quick and inexpensive
stopgap process to deal with payment problems.
Small firms often complain that one of their biggest cost factors is the
cost of dealing with a multitude of adjudication procedures. Every contract they get brings with it a
different procedure. All these procedures
seem to have as their main aim the desire to frustrate or undermine the
intention of Parliament in introducing adjudication. When section 108 of the Construction Act made
clear that contracts must contain eight requirements relating to adjudication,
it was thought that this would help produce an industry standard. This has not emerged and is unlikely to do
so. But there is hope. Industry bodies are currently working on
amending the Scheme for Construction Contracts (the fall-back procedure for
adjudication). If there is industry consensus
for these amendments, we urge that the Scheme be made the mandatory
procedure. This would accord with
legislation in other countries such as 19. Whilst we give a cautious
welcome to Part 8 further work needs to be done to ensure that it is SME
friendly and now takes account of the massive pressures on SMEs in the
industry. Many firms are in a parlous
state. Payment abuse is on the
increase. Building, an industry
publication, reported last week that some main contractors were insisting that
their sub-contractors agree to accept less than that due; otherwise they would
not give them another contract. The
Electrical Contractors' Association with 3000 firms - mainly SMEs - recently
reported that 80% of their members never get paid on time. Although the government has acted to relieve
the pressure by insisting that payment periods should be reduced to 10 days on
public sector works, this requirement is not filtering down the supply
chain. We now have an opportunity to
make a difference through Part 8. (a) Amend clauses 139 and 140 in the way we have suggested; (b) Remove the pay-when-paid exemption in section 113 of the
Construction Act; (c) Omit clause 140(10); (d) Stipulate a single adjudication procedure that is mandatory for all contracts,
and (e) Extend the statutory right of suspension so that it is available in cases where a payer is not able to produce adequate security for payment such as a bank guarantee or payment bond; in other words, extend this statutory right so that it can be used as a pre-emptive strike to save businesses from having to provide more and more unsecured credit.
1. The SEC Group comprises the construction industry's six premier trade associations which, in turn, represent a sector comprising 60,000 companies. They are the Association of Plumbing and Heating Contractors; the British Constructional Steelwork Association; the Electrical Contractors' Association; the Heating and Ventilating Contractors' Association; the Lift and Escalator Industry Association; and SELECT (Electrical Contractors Association of Scotland). June 2009 |