Payment: is a standard needed?
24 March 2017
Phil Hardy-Bishop explains the need for a payment standard
Life is becoming increasingly busy. With the constantly evolving demands of work, how do workers ensure they are paid on time – or at all? This is where the concept of a payment standard can come into play.
If the supply chain can demonstrate compliance with a standard while ensuring that construction operates ethically, it can make a significant difference to the provision of infrastructure, the wider construction industry and society in general.
Payment process problems
Financial set-ups for infrastructure projects involve a complex network of companies, shareholders, frameworks, lenders and holding organisations; unfortunately, these enable the supply chain to profit from cash flow by holding on to working capital.
They do so partly as a result of an individual's desire to maximise profit for their organisation and partly because of the nature of the industry, with its cycles of boom and bust and general underinvestment. Other possible reasons may include the fact that margins are very slim, separate ongoing projects require financing or there are problems with payments from another client.
With the constantly evolving demands of work, how do workers ensure they are paid on time – or at all? This is where the concept of a payment standard can come into play
While a large number of initiatives – from building information modelling (BIM) through conventional forms of collaboration to the establishment of alliances – are in progress to try to improve the industry and remedy these issues, no single taskforce will address behaviours that are so deeply ingrained.
In addressing the problem, we should also differentiate between delayed payments and late payments. Where priorities change and issues with quality of the work mean payment cannot be made on application, this counts as a delay; in other cases, payment is not made by cashiers in a timely manner, and so this is considered late.
Recognising in this way that problems with payment are not isolated to the work of cashiers but part of the whole process of application, certification and clearing, a payment standard needs to cover the entire process.
The need for a standard
In January 2016, the Constructing Excellence Member Forum's workshop on the Payment Minefield brought together a number of professionals to discuss fast payment. It explored project bank accounts (PBAs), the value of fair payment charters and how electronic payment processes need to provide transparency. The idea for a payment standard was born.
The idea consists in applying a quality standard to the payment process: organisations would need to adopt the payment standard to be certified for their compliance. Once a sufficient number of suppliers and sub-suppliers are certified, it is hoped that large clients will demand certification as a matter of course.
Once this process matures, a metric could be added to the certification to confirm that a company is paying a minimum percentage of its bills on time. Smart clients can vary this parameter between projects to allow less mature suppliers who might miss the occasional deadline the chance to tender.
Discussion between RICS and the British Standards Institution (BSI) has since concentrated on researching other similar standards and on working out how a Publicly Available Specification could be created and implemented so that suppliers' compliance with contract and legislative requirements could be certified. They have also considered how written accounting for electronic systems and PBAs and client bank accounts can be incorporated.
Combined with other applications, BIM certainly offers payment opportunities: imagine making a claim for payment or processing a cheque via smartphone, or having contractors submit timesheets electronically and approving payment on a tablet. But the payment process has to be ready to modernise before it can go beyond BIM Level 2 equivalent, so while BIM is part of the answer, it is not the whole answer.
Financial set-ups for infrastructure projects involve a complex network of companies, shareholders, frameworks, lenders and holding organisations
Promoters of PBAs as a means of payment to the supply chain have in the past neglected to mention that on smaller projects, these represent an administrative burden. Senior lawyers are also not convinced of the status of the Deeds of Trust, which are made between those parties to set out the joint ownership of the PBA: the client still requires the main or lead contractor to administer the PBA, creating opportunity for the delay in other projects where the main and subcontractor are working together on a wholly unrelated project, for example.
As far as the current fair payment charter goes, this too is a laudable statement of intent. Unfortunately, it still lacks teeth when it comes to the procurement process. Non-compliance may go undetected, and it might not be possible to take effective action against those who flout the charter either.
Early discussions with the government's Infrastructure Projects Authority have directed us to the Department for Business, Energy & Industrial Strategy. David Hancock, Chief Construction Advisor has also referred us to the Construction Leadership Council.
But now we need to have some voices from industry to support this initiative, so we can begin to exert an influence. Once government and industry endorsement has been received, we hope to begin work with BSI and start the process for creating the standard.
Phil Hardy-Bishop is the former RICS UK Infrastructure Director
- Related competencies include: Project administration
- This feature was taken from the RICS Construction journal (February/March 2017)