Professor Rudi Klein on the Prompt Payment Code

The Prompt Payment Code was meant to improve all-important cashflow for businesses. But after the suspension and removal of several high-profile signatories, Rudi Klein says it’s been about as useful as a chocolate hot water bottle

The Prompt Payment Code (PPC) is operated by the Chartered Institute of Credit Management on behalf of the Department for Business in London (BEIS). There is a commitment in the PPC that says its signatories must pay 95% of all invoices within 60 days. It is now more than ten years old and, after all this time, it has suddenly come to life.

Why, one might ask, didn’t the Chartered Institute or UK Government take such action years ago? In July 2017, Carillion signed up to the PPC while taking upwards of 120 days to pay its supply chain. At that time, it seemed to be acceptable to take as long as one wanted to discharge payment provided it was made on time (in Carillion’s case, on the 120th day).

Who has been kicked off and suspended?

The first tranche of disciplinary action happened in April, when eight large construction businesses were among 17 firms either suspended or removed from the PPC.

Suspended companies were required to produce action plans to demonstrate that they would change their ways by ensuring invoices would be discharged within 60 days.

In July, 18 more firms were penalised for late payment, including construction companies Ferrovial Agroman, Galliford Try and Alun Griffiths, a large Welsh-based company.

Payment reporting regulations

The Reporting on Payment Practices and Performance Regulations 2017 now impose a statutory duty on large companies to report publicly on their payment policies and practices.

Large companies are those that have exceeded two of the following three thresholds in their last two preceding financial years:

  • £36 million annual turnover

  • £18 million balance sheet total

  • 250 employees.

These regulations apply to financial years beginning on or after 6 April 2017. Reports have to be submitted within 30 days of each six-month period within a company’s financial year and they must include:

  • average number of days to pay suppliers from the date of receipt

  • of invoice or payment application percentage of payments paid in 30 days or less, between 31 and 60 days and in 61 days or longer

  • percentage of payments not discharged within the agreed terms.

A UK Government website has been set up to display the data. The availability of this information has now prompted the Chartered Institute of Credit Management to check whether the PPC’s signatories are all paying within 60 days.

So, how useful is the PPC?

The short answer is: As useful as a chocolate hot water bottle. But let’s answer the question in full by asking another question: Has it shortened payment times in the ten years of its existence?

The answer must surely be a resounding no. In fact, payment performance has worsened over that period and is still showing no signs of long-term improvement.

Research published by SEC Group Scotland in May this year, based on a survey of firms including SELECT Member businesses, revealed that almost half of payments to 45% of subcontractors on public sector works were late, with 85% of firms on public sector contracts not receiving any payment within 30 days.

Release of retention monies takes longer and longer, and the PPC doesn’t deal with the other major type of abuse, which is the failure to pay the correct amount. Time and time again, small businesses suffer shortfalls in their payments, with the only remedy costly adjudication.

The only thing that can be said about the PPC is that, in suspending or expelling signatories, it is finally applying some pressure on the large companies to change their ways. But, so far, only Costain has been re-admitted as a signatory.

It will be interesting to see whether or not other suspended firms will be successful in improving their payment performance. I suspect many will not bother unless there are consequences for not being a signatory.

Consequences of not being a signatory

The problem has always been that there’s no incentive to be a signatory to the PPC, and generally clients don’t care if a main contractor is signed up or not. This may change if the UK Government sticks to implementing its threat to exclude from bidding main contractors who haven’t paid their subcontractors within 60 days on 95% of their invoices, although this percentage is now reduced to 75%.

But this policy appears to be at odds with the statutory duty imposed on UK Government procurers to ensure that there are 30-day payment clauses in all subcontracts.

I reserve judgment on whether this policy will have a significant impact but, for the moment, the PPC is still as useful as that proverbial hot water bottle. However, this could change if the Small Business Commissioner is given the power to penalise late payers.

Relevance to Scotland

The PPC has never had much traction in Scotland, and a voluntary code will never make any difference. There are only two measures that will have an impact – project bank accounts (PBAs) and protection of retention monies.

PBAs prevent monies passing through different pockets; clients make payment to a ring-fenced bank account from which all project participants are paid. The ambition must be to mandate the use of PBAs for all construction works in Scotland.

The Scottish Government is currently considering reform of the retentions system and SELECT and SEC Group Scotland continue to apply pressure for laws to protect retentions by insisting they are deposited in a trust.

Professor Rudi Klein

SEC Group CEO and Barrister

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