Late payment is a serious problem in the construction industry. This is true no matter what country you’re working in. Recently, the UK has been focused on cracking down on late payment and bad practices in construction, particularly in the wake of the Carillion crisis. One way the government has decided to tackle this issue is by introducing the Small Business Commissioner and Late Payments Bill. This bill contains a package of measures meant to protect the cash flow of small suppliers and other small and medium-sized enterprises (SMEs), restrain certain predatory practices, and increase transparency in the industry.
The Small Business Commissioner and Late Payments Bill
The bill in question is being referred to as The Small Business Commissioner and Late Payments Bill (HL Bill 44), which was recently introduced into the House of Lords by Lord Mendelsohn. If passed, this bill will make numerous amendments to a variety of existing regulations. In addition, it will increase the powers of the Small Business Commissioner to counter the issue of late payment in the UK. Late payments don’t just cause financial hurt. In fact, a recent study found that late payments are driving an increase in mental health problems for small business owners.
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Let’s summarize some of the most significant changes contained in the bill.
Sets shorter payment deadline on private projects
One important change is to the Late Payment of Commercial Debts (Interest) Act of 1998. This Act contains provisions about the timing of payments on private projects. Under the existing law, invoices on private projects must be paid within 60 days from the later of:
- The due date under the contract terms
- When the work was performed
- When the purchaser has notice of the debt
The new UK bill would require payments on private projects within 30 days, actually cutting the timeframe in half. This would match the deadline on public projects. In addition, as the interest accrues, it will automatically be added to the unpaid balance. This prevents the creditor from having to file a separate claim.
Create new dispute resolution processes
Another significant change is the new payment dispute resolution procedure. HL Bill 44 will provide different statutory periods for verification of a claim and a mandatory 21-day resolution period. If the parties can’t come to an agreement, the dispute may be referred to the Small Business Commissioner. This would avoid forcing parties into costly adjudication.
A specific focus of this bill is to crack down on certain predatory practices by contractors, also known as “subbie-bashing.” Such practices include demanding discounts for paying invoices early, and including contract clauses that prohibit the sub from stopping work or supply for non-payment.
This will be accomplished by amending the Enterprise Act of 2016 to require the Secretary of State to impose regulations targeting some specific practices. In addition to that, these regulations will also prohibit charging fees for things like submitting invoices, becoming a supplier (on-boarding), and getting on the approved supplier list (aka pay-to-stay).
Make late payment data public
In an effort to increase transparency, the Small Business Commissioner would be required to publish ranked performance and payment data annually. Under the proposed changes to the Enterprise Act, the payment practices of large businesses and public contracting authorities would be made public. This list would include their history of outstanding payments and interest penalties they have paid in the last year. This late payer information would be reported by businesses, and collated and ranked by the Commissioner.
(On a related note, Levelset recently launched Contractor Profiles, a platform that makes the payment practices of US-based contractors more transparent.)
Project bank accounts for public projects
Lastly, the bill would also make changes to the current Regulation 113 of the Public Contracts Regulations of 2015. If the new bill is approved, the law will require all public contracting authorities on projects over £5,000 to place project funds into a trust account. The public authority and the contractor will act as trustees for the benefit of the contractor, subs, and suppliers on the project. Effectively, this would protect the funds. If payments aren’t made, this provision would ensure that they can be held liable for the misappropriation of funds.
This provision would have a similar effect to the construction trust fund acts in many US states.
Will these new UK regulations help?
It’s nice to see the UK taking a proactive approach to tackling late payment issues. But at the end of the day, the actual impact of these changes is still up in the air.
Lots of well-meaning politicians have tried to improve the construction payment process, but ended up making the whole system more confusing. More regulations aren’t necessarily the answer. Laws and rules, just like in any game, can be manipulated and unfairly used to gain leverage.
The construction industry has a fundamental problem of protectionism. New laws too often attack a symptom, rather than the underlying disease. Until construction businesses can learn to adopt a more cooperative and transparent approach, payment problems will continue to persist in the construction industry. As for the Small Business Commissioner and Late Payments Bill? We’ll keep an eye on it – and hope it moves the industry even one step closer to construction payment utopia.