£1 billion of cash retentions used by public sector to supplement working capital
Research from the Specialist Engineering Contractors’ (SEC) Group has shown that 38 % of public sector clients make late payments to tier 1 contractors and the public sector uses £1 billion of cash retentions to supplement their working capital.
The year-long SEC Group initiative was based on questions submitted under the Freedom of Information Act, and attracted more than 650 responses from the local councils, universities, fire and police services and NHS trusts from across the UK.
The survey revealed that 38 per cent of respondents failed to pay their tier 1 contractors within 30 days of invoice, which is breach of payment legislation.
In addition, only 25 per cent of those surveyed could confirm that they had measures in place to track payment performance in the supply chain, and almost 90 per cent applied a cash retention. The overwhelming majority of public bodies also admitted using £1 billion of cash retentions to supplement their working capital.
In terms of wider procurement, 86 per cent of respondents did not make exclusive use of the PAS 91 standard pre-qualification questionnaire, with the health sector being the worst offender.
At an event in the House of Commons held to reveal the results of the survey, fair payment campaigner Debbie Abrahams MP said: “The public sector should be setting an example in how to manage and treat its construction supply chains and should be the foundation on which we build a fair payment culture in this country.”
David Frise, AIS FPDC chief executive, said: “This is a and useful piece of research that clearly demonstrates that government has some way to go in public procurement policy to drive better payment practices. What is perhaps most shocking is some local councils taking 10% retention on contracts, life is difficult enough for SMEs without this imposition.”
SEC Group has developed a six-point action plan in response to the survey result which include:
- All payments under public sector construction contracts should be made within 30 days of the end of the month in which the work was carried out.
- Any organisation failing to pay its supply chain within 30 days should be excluded from further public sector work for a minimum of 12 months.
- Legislation must be introduced to require all cash retentions to be placed in trust (in a segregated account) for the benefit of the firms providing the monies.
- Targets should be set for the introduction of project bank accounts across the public sector, to ensure that the supply chain is guaranteed payment.
- The pre-qualification process should be standardised across the whole of the public sector through the introduction of a British standard.
- The office of Public Procurement Ombudsman should be created to monitor and police poor practice.
Referring to the proposal for an ombudsman, SEC Group chief executive Professor Rudi Klein stressed that this needed to be a high profile role: “The regulator would have the power to challenge poor practices and to order recalcitrant public bodies to mend their ways.”
“There is an expectation that construction SMEs will invest in skills and training and smart technologies with the efficiencies thereby created directly benefiting the public sector. But this is not achievable unless robust measures are adopted to improve cash flow throughout the supply chain.”
