New Year - new Industry ?

12 Feb 2018

New Year – new industry?

Since the New Year began we have seen a number of events and announcements that suggest that the existing supply structures for the construction industry are broken.

Dame Judith Hackett published her interim report with the startling conclusion that the system is not fit for purpose at the most basic level to provide a safe environment to those dwelling in high rise buildings. [1]

At the same time the discussion that has taken place in the context of the payment and dispute resolution consultations from BEIS has highlighted what those representing the industry have known for some time. [2]The industry still does not follow the amended legislation either in terms of the contracts it drafts or the implementation of the procedures that the legislation requires. Further, many responses to the consultation have suggested that the adjudication process has become too expensive for disputes of less than £100,000 (some put the range as being £100,000 to £50,000).

The collapse of Carillion has highlighted the risks for the supply chain in exposing itself to payment terms where months of work are unpaid for and the supply chain is an unsecured creditor in the hierarchy of creditors.

Tier 1 contractors such as Carillion whose potential insolvency poses such a threat to the supply chain argue that in the current climate of competition, which drives ever lower bids, that increasing profitability is not possible. The best that they can do is chase a pipeline of work to feed the overheads and liabilities stacking up behind them.

Faced with these stark realities, can we expect change?

There is the suggestion that there will be a root and branch review of the legislation and procedures that produce the complex web of obligations and liabilities that manage the safety of residents. [3] A private member’s bill has proposed that retentions will be held in stakeholder accounts (much like tenants deposits). [4]

With all these competing demands is change really likely and in what timescale would it be realistic for companies to expect any modification to the trading conditions they face?

 It is a difficult question but a betting man would not get good odds that anything will happen this year.

It seems that for now the supply chain must manage the risk and take care not to expose itself too badly.

Cash flow becomes more important than ever when the cash in the payer’s hands is liable to disappear in insolvency.

This requires that payees carefully consider the payment terms and rigorously implement the procedure which the contract requires.

Collecting retentions must be a priority. It was shocking to see in the research undertaken to support the consultation on retentions that much of the industry still had not understood that the release of retention could not be linked to the release of retention in a tier above. Is it this misunderstanding of the law or a reluctance to pursue retention that leaves so many owed large sums by parties whose long term solvency should not have been taken for granted? [1]

Collecting retentions requires that their release date is carefully documented and systems are in place to chase them as matter course.

Given the twin challenges of a tightening in the supply of labour and materials inflation, increasing profitability may be a tough call for the supply chain. We should not expect to see an increase in profitability but we will see a gap arising between those who manage their cash flow, collect their debts and limit their liabilities and those who fail to do so.

The cavalry is not coming anytime soon and this year will be a question of survival of fittest. The survivors will have good management systems and either an in-house capability to review and manage these risks and collect their debts or access to support at reasonable cost who can do this for them. Whilst instructing external lawyers either to review contracts or resolve disputes may not be an option for all but the largest organisations, there is good advice out there and adjudication need not cost the astronomical figures quoted by many in their response to the government consultation.

 

[1] “ The overall conclusion is that the current regulatory system is not fit for purpose in relation to high rise and complex buildings.” Independent Review of Building and Regulations and Fire Safety:Interim Report.

[3] Independent Review of Building and Regulations and Fire Safety:Interim Report.

http://cic.org.uk/news/article.php?s=2018-01-26-cic-welcomes-james-frit…