Fair pay vital for sustainable construction

Fair payment is the key to unlocking true supply chain collaboration, and now we have the tools to achieve it, says HVCA president Gareth Vaughan.  Gareth Vaughan has been at the sharp end of building services contracting since 1973 so knows all too well that good cash flow is critical to keeping construction projects on track.

Having started his working life as an installation assistant at the Colwyn Bay ductwork contractor E Poppleton & Son, he quickly rose to the position of supervisor in 1976 and then contracts manager in 1981.  Eight years later he became managing director and is still in that post today. He was elected President of the Heating and Ventilating Contractors’ Association (HVCA) in July this year.
“Ductwork contracting may not be regarded by many as the most glamorous part of the construction supply chain, but it gives you a unique insight into how a project comes together…or not,” he says. “We are also right at the heart of attempts to improve collaboration without which, I would argue, the industry will not deliver on its sustainability promises.

“Antiquated and unfair payment practices are holding everyone back.”
Too much cost and misery has been the result of specialist contractors being denied fair payment on time for work they have completed. This has been a major contributor to poor delivery of many projects, believes Vaughan.

The House of Commons Business and Enterprise select committee seems to agree and has called for earlier involvement of the supply chain in the procurement process, an end to payment retentions and, crucially, more extensive use of project bank accounts, project insurance and collaborative contracts “to facilitate team working”.
A recent House of Commons briefing on the subject brought high level support for attempts to reform payment across construction.
“Poor payment practices erode goodwill and inflate tender prices. Payment certainty is the lifeblood of the construction supply chain,” said Brian Kilgallon, a partner in property and construction consultancy Ryder Levett Bucknall during the briefing.
Vaughan, both in his role as a leading ductwork contractor and now as HVCA President, has been fronting the arguments for a fairer payment regime for years, but now he believes the industry has some practical tools that can make it happen. 

He particularly supports Project Bank Accounts (PBAs), which, he says, have the potential to revolutionise payment practices and save a great deal of time and money for all involved in construction projects.

PBAs have been designed to ensure that all members of the supply chain receive their payments promptly and at the same time as the main contractor. The PBA is a joint or trust account set up between clients and main contractors.

The contractor prepares a payment schedule, which details certified sums due to each member of the supply chain and himself.  Invoices are raised in the normal way with the client matching the invoice with the certificate and releasing funds into the account.
At this point, both the client and the lead contractor issue that payment schedule to the bank. When the bank receives the dual authority from both parties, funds are released automatically to the supply chain and the main contractor.  “Security of payment, particularly for small and medium sized enterprises, is the main driver behind this initiative,” explains Vaughan. “Many SMEs are forced out of business, despite having carried out their work and having done everything required of them, because the company they are working for goes bankrupt.”

Discount
The PBA is structured so that all funds are owned and belong to both the main contractor and the sub contractors, providing insolvency protection for all parties in the event of the main contractor going bust.
Initial research, carried out by the Specialist Engineering Contractors’ (SEC) group, suggests that members of the supply chain would be prepared to discount their prices by 2.5 per cent in return for this kind of payment surety. The discount would be recouped from the finance charges that can be left out of the sub-contractor’s initial price, because he knows he will be paid within 30 days, and the insolvency insurance, which would no longer be needed.

Over time, other cost benefits would emerge including the removal of overheads to cover debt chasing and the cost of disputes.
Projected short term savings for public sector clients, should they adopt PBAs, are in the order of £200 million growing to £750 million over time as the overhead reductions are flushed out. This has prompted the Office of Government Commerce (OGC) to recommend that all government procurers “aggressively specify [the use of PBAs] where practicable and cost effective” in its Best Fair Pay and Practices guide, published earlier this year.

“The creation of a more collaborative project team would produce savings for all involved – the client in particular – not only through reliable prompt payment, but also by cutting out the costs associated with unnecessary disputes,” adds Vaughan. “One statistic quoted by brokers is that for every £1 paid out in successful professional indemnity claims; £4 is paid to cover legal costs. That level of waste is something our industry can ill afford.

“Defensive stances, bred by traditional divisive insurance policies, create a negative ‘blame culture’ and, as has been shown time and time again, those policies don’t actually give the client any real certainty. They do, however, prevent supply chain collaboration.”
Using PBAs also opens up new insurance options such as integrated project insurance (IPI) that covers the whole project team so encouraging them to resolve disputes internally and avoid costly blame shifting or buck passing.

Clare Curtis-Thomas MP, chair of the All Party Parliamentary Group for Building Services, also believes PBAs are the most comprehensive single solution to combat the issue of late payment.
“I believe the PBA can remove mistrust and confrontation,” she said during the House of Commons meeting. “Given their value and benefit I suggest that it is reasonable to expect that public sector clients will increasingly seek the use of PBAs on publicly-funded projects, perhaps to a point where they become mandatory.
“You can rest assured that I shall continue to press for work on security of payment and I know that my colleagues, John Spellar and Nick Raynsford, will continue to support me in that endeavour,” she added.

“These are not easy goals to achieve – they invite us to change practices that have been established over many, many years, but we will continue to work to ensure that SMEs are rewarded for the work that they do,” said Ms Curtis-Thomas. “We also expect large companies to ensure that SMEs are looked after and that they behave in a manner that is indicative of an industry for which we have tremendous regard.”

Status
Vaughan believes that the growing demand for a sustainable built environment is contributing to the improved status for the industry referred to by Ms Curtis-Thomas.
“Building services contractors are now seen as highly qualified professionals, capable of original thinking and genuine innovation,” he says. “Our role in producing a sustainable built environment is increasingly complex. It requires significant long-term investment in new technology and the skills and competence of our people if we are to ensure that buildings comply with ever-stricter regulations and ever-higher quality standards.
“Without fair payment in full and on time, SMEs will find it increasingly hard to make that investment.”

Vaughan has a track record when it comes to education and skills as he has served as a director of Engineering Services SKILLcard since 2002 and he is spearheading the HVCA’s continuing efforts to develop skills and competences across the sector.
“We are living through the ‘Age of the Engineer’,” he says. “It is difficult to imagine a more challenging time in history for building services engineers as we begin to ‘decommission the carbon age’ by designing, manufacturing, installing, commissioning and maintaining our built environment in a way that maximises energy efficiency and reduces environmental impacts.”
However, for specialist contractors to be able to play their role to the full, they must be treated as equals in the professional hierarchy and enjoy a similar status when it comes to sharing the profits.
“There is no reason for us to be shy about creating a profit from sustainability,” adds Vaughan. “As well as being a great chance to contribute to the greater good, this is also a time of unprecedented business opportunity.

“The payment tools now available to us can make the supply chain a fairer and more productive place by removing many of the obstructions created by an archaic money model that has been in place for almost two centuries. This barrier to progress has to be eliminated so the industry, as a whole, can get to grips with the massive challenges ahead.”