MP publishes late payment inquiry recommendations

A cross-party parliamentary inquiry, convened and chaired by Debbie Abrahams, MP for Oldham East and Saddleworth, has published 11 recommendations about how to tackle the issue of late payment to small and medium sized businesses.

Debbie said: “A recurring theme in the evidence our panel was given is that, ultimately, the issue is one of leadership.

“Until top CEOs, and their executive board members, make a decision to act ethically in business, and treat our small and medium sized businesses fairly, this problem will persist.

“The public has grown tired of hearing about huge, greed driven, pay packets, pay-offs for failure and tax evasion; but allowing a culture of late payment to persist unchallenged is another board-level decision that directly effects ordinary, hardworking, people across the country.

“Incidentally, shareholders also have a responsibility to hold their executives to account.

“Appearing at the inquiry took courage from our contributors. The top FTSE companies have been under scrutiny in recent years and those we invited could have chosen to ignore our request to give evidence but they did appear and we are grateful for their candour.

“But special thanks should go to the SME owners who really demonstrated the damaging impact late payment has on our businesses not to mention the emotional impact on the owners and employees themselves.

“I am also grateful to my colleagues from across the political spectrum for their participation on the inquiry panel and demonstrating that, although we may have different political views, we can work together to find a solution to this persistent problem.”

The other members of the MPs’ panel were: Mike Crockart, Liberal Democrat MP for Edinburgh West; Alex Cunningham Labour MP for Stockton North; Caroline Dineage, Conservative MP for Gosport; Rt Hon Michael Meacher Labour MP for Oldham West and Royton; Toby Perkins Labour MP for Chesterfield; and Robin Walker Conservative MP for Worcester.

Mike Cherry, National Policy Chairman, Federation of Small Businesses (FSB), said: “This research clearly highlights the ongoing problems faced by small firms when they are paid late. The Be Fair, Pay on Time campaign has done a good job in getting big businesses to sign up to the prompt payment code but there is still more to be done.
“We have said for some time that the Government and local authorities should include terms in contracts for prompt payment to be passed down the supply chain.

“This report provides a good starting point to open up the discussion on what can be done to make sure small firms are paid promptly for the work they have done.”

CEO at the Forum of Private Business (FPB), Phil Orford MBE, said: “The government needs to give serious consideration to refusing any public sector contract to big businesses who don’t pay suppliers in an acceptable time frame. Or indeed only work with those companies who’ve signed the Prompt Payment Code.

“With more than £300b of capital spending announced in the recent spending review, this would have maximum effect at no cost to the government, but really help in the battle against poor payment practices so widespread in the UK economy these days.”

Steve Sutherland, Chairman of Dortech Architectural Systems Limited, who appeared before the inquiry on the SME panel, says: “The last twelve months have been the worst in my 45 working years.

“I have watched in disbelief as a tough market has driven major companies’ boards of directors to turn a blind eye to malpractice within their businesses and the resultant destruction of essential supply chain support, skills and entrepreneurialism on which the UK depends.

“This excellent broad based, balanced research, and investigation now provides the basis and opportunity to bring about the critical first steps of change, if Government and the directors of companies have the courage to embrace and implement the recommendations.

“The recommendations and the spirit of the recommendations could be implemented with minimal cost and legislation and reflect a sensible first step to bringing some ethical common sense back to the market.

“I shudder to think what will happen to the UK construction industry and build quality if the proposals in this report are not implemented in the undiluted form presented in this report.”

Steve Paul, Managing Director of SDP Screeds Limited, who also contributed to the inquiry as an business owner who has suffered from late payments – and who told the MP's that the late payment culture is 'organised crime' - said of the report: "I'm really hopeful that this report will give big business leaders the push they need to change the way the use of late payment to SMEs is considered the norm in ours and other industries.

"It's wrong that SMEs are expected to continue to provide services and complete the work they are contracted to do and then have to wait as the larger, more powerful, companies use every tactic in the book to avoid paying in the agreed timeframe.

"Having said that, as a result of the inquiry, I have been having very positive discussions with some of my larger clients and we are talking about how we can address, and avoid, some of the issues raised."

The Specialist Engineering Contractors (SEC) Group, which represents 60,000 firms employing over 300,000 people through six trade associations**, the largest element (by value) of UK construction, has also come out in support of the inquiry’s report.
Professor Rudi Klein, Chief Executive of the SEC Group, said he was very impressed by Debbie Abrahams: “She is clearly committed to addressing this cancer of payment abuse that is currently pushing thousands of firms in the construction industry towards insolvency.

“Small construction firms in her constituency and throughout the UK will take heart from her Be Fair – Pay on Time campaign and the lead she has taken in driving forward this late payment inquiry into the issue.”

Report recommendations:

4.1 The recommendations to address the issues associated with late payments are as follows:

4.1.1 Developing ethical business practice to stop late payments 
There was evidence from witnesses and from the literature that paying supplier late reflected the culture and ethos of a company. Stopping this poor practice requires a change in corporate behaviour and this needs to be driven from the top. The leadership and culture of large businesses determines the relationship with suppliers, including contract terms and payment. Evidence was also presented to suggest advantages to large organisations engaging with suppliers rather than just monitoring and auditing them. Key elements of ‘good practice’ were also defined.

Recommendation 1: The Government should promote the adoption of ‘good practice’ guidance for large companies in managing supply chains, including publishing performance data relating to payment-on-time to suppliers in audited annual accounts.

Recommendation 2: The Government should encourage businesses to publish information for investors and shareholders defining their support of, and compliance with, ethical business practice, for example, signatories of FTSE4Good Index Series or Ethical Trading Initiative

4.1.2 Helping SMEs avoid late payments 
Evidence from the literature identified financial practice issues, for example, invoices being incorrectly completed, as a contributory factor to paying their suppliers late. SMEs need to develop robust financial management systems and skills which reduce the risk of invoices being delayed or rejected by their contractors. To help redress the power imbalance between individual SMEs and their contractors they also need to develop new or strengthen existing trade associations to liaise across, and negotiate on behalf of, the industry.

Recommendation 3: The Government should support SMEs avoid late payments through free, high-quality financial management advice and/or training, for example, through trade associations, SME organisations, or local SME advisors.

Recommendation 4: The Government should work with SMEs and support the establishment or development of trade associations to negotiate, e.g., a Fair Treatment Charter, on behalf of member organisations.

4.1.3 Strengthening voluntary codes to reduce late payments 
Evidence from witnesses indicated that the Prompt Payment Code (PPC) was seen as a useful starting point for developing commitment to paying suppliers promptly. However in recent months it had fallen into disrepute as some signatories had signed up to the PPC after changing the terms and conditions of their contracts with their suppliers without negotiation. The lack of monitoring, for example, of whether signatories and their supply chain paid promptly, was also seen as an issue.

Recommendation 5: The Institute of Credit Management should review and amend the PPC to reflect the issues identified.

4.1.4 Preventing late payments through legislation 
Although it was acknowledged that late payments happen in all sectors, there is evidence that the manufacturing and construction sectors are the worst offenders. In view of the evidence presented concerning the issues in the construction industry, it was felt that there should be urgent action to address the late payments issue in this sector:

Recommendation 6: The Government should establish a Construction Code of Conduct, similar to the Grocery Code, with an independent adjudicator for mediation.
To ensure that large companies are not intentionally delaying payments to suppliers for their own financial purposes, the contractually agreed payment should be held in an independent trust. Once all the conditions for that contract have been met, the payment can be made to the supplier. A Credit Ombudsman will arbitrate in disputed cases. This will require legislation:

Recommendation 7: The Government should introduce a Retentions Monies Bill with money retained by a customer for a supplier to be held in a trust.

4.1.5 Preventing late payments by the public sector 
Although the public sector as a whole has made great strides to improve their payment performance, this does not currently flow down the supply chain. To address this, the following recommendations are proposed as part of the public sector procurement process:

Recommendation 8: The Government should require all new Government contracts to include Pre Qualification Questions on past payment performance, and should consider the payment history as part of the bidding process.

Recommendation 9: The Government should make fair payment a contractual requirement for new Government contracts, with Tier 1 contractors paid within 14 days, Tier 2 within 19 days and Tier 3 within 23 days.

4.1.6 Gaining redress for late payments through legislation 
There is evidence that there has been reluctance from SMEs to use past legislation, e.g., to claim interest on late payments, because of the fear of ‘blacklisting’. The new EU Directive on Late Payments (2011/7/EU) which came into effect in the UK in March 2013 may alleviate this. It requires business-business invoices to be paid in 60 days and public authority-business invoices in 30 days, with debtors forced to pay interest with and an administration fee. However through article 7.4 it allows an intermediary to act on behalf of the supplier.

Recommendation 10: The Government should support intermediary agencies, e.g., SME organisations or trade associations, to act on behalf of suppliers seeking recompense through Late Payments Directive.

4.1.7 Reducing the effects of late payments 
The late payments issues facing SMEs are brought into sharp focus because of the state of the economy. Shrunken order books are exacerbating cash flow issues, which in turn are affected by difficulties accessing finance and getting paid on time.

Recommendation 11: The Government are urged to implement a growth strategy that recognises the importance of SMEs and to commission research to assess the macroeconomic effects of late payments on SME suppliers.

 

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