Small Business, Enterprise and Employment Bill

Written evidence submitted by the National Federation of Roofing Contractors (SB 42)

Executive Summary

· Most NFRC members believe that the Government does not provide businesses with enough information on accessing finance. This issue must be addressed.

· Archaic payment practices such as late payments and retentions impact on almost all businesses in the roofing industry; these practices can severely stunt business development.

· The Government must be much more active in addressing these practices, and commitments to better payment practices must be enforceable. Voluntary agreements are not enough.

· A requirement for companies to publish information about their payment practices and policies could make a difference to the culture of late payments if the requirement was enforceable and the information readily available.

· Government should be setting the standards of best practice in its own procurement. This includes taking action to ensure that full payment reaches the bottom of the supply chain in a timely manner.

1. The National Federation of Roofing Contractors (NFRC) is the UK’s leading trade association for the roofing industry. The Federation has over a thousand contractor and associate members and is an active member of the International Federation of Roofing Contractors. With a turnover of £1.6bn, NFRC members represent 70% of the UK roofing market by value. Companies vary from the very smallest local company to some of the largest in the country, carrying out new build, repair and maintenance on existing buildings, and heritage work. The NFRC is also a key member of the National Specialist Contractors’ Council (NSCC) and TrustMark.

2. This response addresses parts one and three of the Small Business, Enterprise and Employment bill, relating to access to finance and public sector procurement.

3. Access to Finance – Information

It is well established that, in order for businesses to become successful and therefore to make valuable contributions to the UK economy, they need access to funding. This is true throughout all stages of business development, and for all types and sizes of business. The Government should support businesses by providing clear and concise guidance on the sources of funding that are available to them, how to apply for this funding, and what the options are when funding falls short of a business’s needs.

4. With this in mind, it should be of some concern that, in a survey of NFRC members conducted in September 2014, most respondents agreed that the Government does not provide enough information to help businesses access funding. Additionally, the majority of NRFC members are not aware that funding from non-traditional sources, i.e. sources other than banks, exists. It is vital that this lack of awareness about funding options is actively addressed. Trade Associations can play an important role in ensuring that information on funding is accessible. Many Trade Associations, like the NFRC, already have communication networks in place that allow them to pass information to large number of businesses in their industries. They are also able to collect specific information from their members on what additional funding information is needed. Any Government information campaign which aims to inform businesses about funding options should make use of Trade Associations as tools for communication.

5. Access to Finance – Payment Practices

The vast majority of NFRC members surveyed stated that archaic payment practices have a significant impact on their businesses and others in the industry. The main culprits are late payments, part payments, and retentions. With regard to late payments, a National Specialist Contractors’ Council (NSCC) Payment Survey found that 95% of specialist contractor respondents routinely waited more than 30 days for payment; one in seven waited over 45 days. This waiting period prevents businesses from growing.

6. ‘Retention fees’ (where money is withheld from sub-contractors for excessive periods of time to cover potential faults) and part payments are also particularly damaging. The NSCC estimated from the survey findings that approximately £680 million was being held in retention payments from its 7000 members. Having such large amounts of money out of reach in this way can severely affect cash flow. At worst, this can even be the primary contributor to businesses failing. Retentions and part payments also take up considerable time and energy to pursue, as subcontractors must actively chase contractors in order to receive the money they are owed. Sometimes the only way to recover the payment is through an expensive legal process – a process that many small businesses simply cannot afford, not to mention a waste of valuable time that specialist companies could otherwise be putting into growing their businesses. In short, these practices are extremely harmful to many businesses. Below is a small selection of comments from NFRC members on the impact poor payment practices:

‘Late payments delay us from paying our supply chain on time and prevent growth of the business. Retentions are an archaic way of ensuring that a contractor returns to site at the end of the defects liability period to carry out any remedial work that may be required and should be replaced by other methods which are more secure and readily available in the current market.’

‘Retentions are a perennial problem, soaking up time and resources to pursue, as well as tying up vital cash that could be used to grow the business. In our case approximately 40% of the net asset value of our business is held up in retentions.’

‘Retentions are one of the biggest problems we face; margins are so low, that often retentions tie up a significant proportion of profit again hindering growth and reinvestment.’

‘Some contractors use queries on small amounts/items to delay payment of large invoices.’

7. The Government must do more to address these practices and mitigate their impacts on all businesses. Retentions are easily tackled by schemes such as bonds, warranties and project bank accounts, which may be adopted in the future by the Scottish Government as part of its new procurement policy. ‘Insurance Backed Guarantees’ are another alternative, which protect a contractor should a supplying subcontractor cease to trade or is unable to complete the work or honour the contract. However, the offer of insurance is rarely taken up by contractors, despite only increasing the price of a project by around 1%. Despite the existence of many alternate methods of protection, the use of retentions has not decreased.

8. The steps taken to date, such as the introduction of specific payment terms on construction projects down to the first 3 tiers of suppliers, and the use of Project Bank Accounts and BACS payments, are all positive steps. However, the lack of policing and monitoring of these payment systems has prevented their intended aims from being fully realised, with late payment still widely practiced.

9. The first action delivered under the Industrial Strategy: Construction 2025 is the new Construction Supply Chain Payment Charter, which was published on 22 April 2014. Developed by the Institute of Credit Management (ICM) and endorsed by the Construction Leadership Council (CLC), the charter sets out the industry’s ambition for 30 day payment terms and no retention by 2025. This is severely lacking in ambition. The problems caused by retentions could be fixed relatively simply (as outlined above), without requiring another 11 years. NFRC members are in full agreement about the how payments should work. Payment, in full, should always be cleared 30 days from billing.

10. The major step forward is on private sector projects with a commitment to payment terms of 60 days from April 2014, 45 days from June 2015 and 30 days from January 2018. The existing public sector commitment of 30 days is embedded within the Charter and will apply to all central Government and wider public sector projects in line with the Late Payment of Commercial Debts Regulations 2013.

11. The Charter requires that cash retention is either not withheld at all or that any arrangements for retention with the supply chain are no more stringent than those implemented by the client in the Tier 1 contract.

12. While this is a positive and welcome step forward towards ending poor payment practices in the construction industry, it is a small one. By the terms of the Charter, SMEs will still have to wait four years until they will be promised payment within 30 days. There is also a risk that Government policy could change following the 2015 General Election and the Charter’s timescale could be put back further, or even cancelled entirely.

13. In this regard it lacks ambition, as there is no real reason that prevents contractors from paying on time now. The Charter also remains a voluntary agreement, with no policing or penalties in place, and thus is ineffective. A simple spot check of companies all the way through the chain could be enough to ensure that the Charter is being adhered to.

14. Most NFRC members do believe that a requirement for companies to publish information about their payment practices and policies could make a difference to the culture of late payments. Two stipulations would be needed to make this successful, though. Firstly, the requirement must be enforceable. If their payment terms are conditions are not already publicly available, large contractors are unlikely to begin disclosing this information without being legally compelled to. Secondly, this information would need to be readily available to subcontractors and other businesses that would wish to use this information to make choices about who they work with. One NFRC member suggested that this could be achieved by having the information for all companies available at a single point, like a dedicated website.

15. Government procurement

Government itself needs to take the lead in improving payment practices. Currently, ‘Some of the worst offenders are main contractors working on government funding projects’, one NRFC member argued. Recent statistics add weight to this assertion. The Government has made payment within 30 days down to the third tier of the supply chain a requirement on all central Government contracts, with central government departments aiming to pay 80% of undisputed invoices in five days. While Government departments are, on the whole, prompt at paying their main contractors, they act no further to ensure that full payment reaches the bottom of the supply chain in a timely manner. The latest figures from the National Specialist Contractors Council (NSCC) show that in the first quarter of 2014, of the 44% of Specialist Contractors that carried out public sector work, only 72% of these contracts were paid within 30 days. In the industry as a whole:

· 63% of SMEs received payment between 30 and 60 days

· 23% were paid between 60 and 90 days

· Only 14% had their payments delivered within 30 days.

16. In Q4 2013, 77% of subcontractors surveyed by the National Specialist Contractors Council had monies withheld against them in retentions at an average of £121,283 per SME. Of these, 26% of all retention monies withheld from Specialist Contractors were overdue for release, which take a great deal of time, effort and expense on the part of subcontractors to reclaim. Only 55% of Specialist Contractors report recovering all retentions. Of the remaining respondents, on average, 30% of outstanding retentions are written off as bad debts.

17. Government should be setting the standards of best practice through its own procurement. A contractor’s history of compliance with payments terms should be used as a way of vetting all those contracted to do Government work. If the suggested requirement for companies to publish payment practices and policies goes ahead, Government should use this information just as any sub-contractor would – to make informed decisions about which businesses they will choose to work with.

October 2014