Opinion: Time to fight poor payment practice

Aaron Morby 8 years ago
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Carillion has managed to divide the subcontracting world with its so-called Early Payment Facility for the supply chain. 

Hundreds of firms working for Carillion have happily signed up to the new 120-day terms which allow earlier payment for a small fee.

They believe the reverse factoring agreement, based on the extended payment terms, is a small price to pay for the right to draw down payments at 45 days.

Carillion’s promise to reimburse the fee banks charge suppliers for the privilege of drawing down cash early has proved a more effective sweetener than many would have first thought. Of course, it remains to be seen how long this offer will last.

The rest of the industry sees the new terms as an attack on the 30-day payment or less that Government wants to see in private and public sector project supply chains.

What the heated payment debate has highlighted is the depths to which industry payment practices have sunk.

Subcontractors now appear willing to accept anything that will speed-up the flow of cash owed to them.

Predictably other main contractors now plan to follow suit although all are going to great pains to emphasise the fact that their payment terms are not being extended.

Reverse factoring will bring relief to some cash-strapped specialists in the short term. What it cannot be allowed to become is an alternative to paying firms promptly.

Whatever the good intentions, it is a fundamentally flawed and morally bankrupt approach.

Many subcontractors are struggling to live with the invidious main contractor rebate on money they are owed.

Paying an extra fee for the right to be paid earlier means many will find themselves 3-4% down in cash off sales.

This is a world away from the fine words and payment charters that Government believes are taking root in the supply chain.

What lies at the heart of the present problem is a major cash squeeze among main contractors.

Falling orders, the growth in term contracts that are far less attractive in cash flow terms and the advance of project bank accounts are all taking their toll on cash reserves.

The main contractor cash crunch will only get worse going forward.

Upward pressure already being felt on labour and material prices is sure to intensify in coming months and strike hard next year.

As order levels improve good subcontractors will find themselves in a much stronger bargaining position.

It may still be early in the recovery but subcontractors may soon be turning the tables on main contractors.

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