Ross Taylor: Mandatory payment practices in the construction sector

Construction law specialist Ross Taylor wonders if it’s now time for mandatory payment practices as the construction sector buckles under Brexit-driven worries.

Ross Taylor

On 18 October 2019, the Office for National Statistics released the annual performance statistics for 2018, relative to the UK construction sector. They suggest the industry is in good health.

Infrastructure projects dominated public sector contracts, taking 41% of total project value. Across public and private sector, new housing projects achieved a value of greater than twice that of infrastructure projects - £43.4m compared with £22.3m - whilst other projects, including health and education, reached a total value of £47.3m.

Having taken a dip in 2010 and 2011, the total value of construction output has surpassed 2010 figures two years running and last year totalled £27.7m.

The number of businesses involved in the construction sector has consistently grown over the last decade, from roughly 200,000 to around 325,000.  What’s interesting is that while the number of businesses with five or more staff have undulated over that period, the greatest expansion has been in the number of sole trader businesses and businesses with one or two staff.

This trend could suggest that more and more people are now self-employed, as big business tightens its belt. The gig economy may have eaten its way into the sector.

Scotland now has over 20,000 construction businesses, employing in excess of 138,000 people.

The numbers confirm the construction sector remains a very important part of both the Scottish and the UK economy. It is overwhelmingly made up of small businesses, whose disputes are often less than £100,000. Housing building dominates – not surprising then that Graham Simpson MSP has proposed an Act of the Scottish Parliament to regulate the quality of new build homes.

The numbers also suggest, however, that publicly funded infrastructure projects may be propping it up in turbulent financial times.

That turbulence is illustrated by the latest quarterly statistics. In the second quarter of 2019, new seasonally adjusted orders fell by 4.7% compared to the same quarter in 2018, according to the ONS.

On 2 October 2019, IHS Markit and the Chartered Institute of Procurement and Supply issued a press release about the results of their latest survey data, in the shape of the UK Construction Purchasing Managers’ Index.

They concluded: “The UK construction sector remained firmly stuck in a downturn at the end of the third quarter. Building activity fell at the second-fastest rate since April 2009, only narrowly outpaced by June’s decline. A historically steep drop in new orders was also registered, while firms trimmed employment at the fastest rate since the end of 2010 due to unfavourable demand, client hesitancy and low confidence.”

The AGM of the Cross-Party Working Group on construction took place at the Scottish Parliament on 29 October 2019, and payment difficulties experienced by some members was a recurring issue throughout the discussions.

Cabinet Secretary for Finance, Economy and Fair Work, Derek MacKay MSP, who attended the event, observed with some pride that Scottish Government contracts include a 30-day payment period – better than norm in the private sector.

All of this suggests an astonishing lack of awareness of the measures available to the construction sector in order to improve cashflow. UK wide legislation has been in place since 1996, which stipulates payment obligations must be included in construction contracts and provides a mechanism for quick dispute resolution.

Their purpose has been to instruct cashflow down the supply chain, with the objective of protecting the longevity of construction businesses and, in turn, employment in a key economic sector.

However, the legislation has not been free from challenges.  It was substantially revised in 2009, with the intention of making improvements. But the revisals have raised new questions, so that utopian protection has not been conveyed.

This is largely because the legislation is designed to provide minimum requirements. Many of its provisions do not fix mandatory dates or other requirements. There is room for manoeuvre, which can be exploited by a knowledgeable or more dominant payer, to stretch out its payment obligations.

Of greater concern, is the lack of awareness around the availability of this protection, more than twenty years after its inception. Most small businesses in the construction sector have little knowledge of the legislation designed to help them obtain quick payment.

For example, the default is actually a seventeen-day payment period – not a thirty-day period – which means that even the Scottish Government may be falling short of the UK legislature’s inducting desire.

Perhaps now more than ever, awareness by SMEs in the construction sector, of the legislative protections available to them to improve cashflow and resolve disputes quickly, may be their saviour. Education is needed across the whole sector.

Perhaps that will not be enough. These uncertain times upon us echo past shadows. The legislation was the product of a government enquiry in 1993, commissioned in the aftermath of Black Wednesday.

To shield the sector from another repeat of historic hard times, the legislation should be simplified. The scope for manipulation should be removed. In short, the default payment terms provided for in the legislation should be made mandatory for the whole sector across all projects.

  • Ross Taylor is partner at Scottish law firm Wright, Johnston & Mackenzie LLP, specialising in planning, commercial litigation and procurement

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