SMEs set to benefit from industry-wide contract changes

Thousands of UK SMEs are set to benefit from revised contract terms as Network Rail takes an industry leading step to change the way major suppliers working on the railway pay their subcontractors.

Network Rail is making significant changes to contracts ahead of the upcoming five year funding period (Control Period (CP6, 2019-2024), which will underpin the delivery of their next £multibillion investment programme. The most substantial changes to contract terms will commit suppliers to pay their subcontractors within 28 days and remove the use of retentions on those payments, something that has long been an area of debate across the industry due to the detrimental effect it can have on smaller suppliers. 

The changes are part of a number of improvements being made to help create a healthier environment for suppliers at all levels and will result in the rail industry becoming the first sector within the wider UK construction industry to enforce these payment measures, overhauling the way large contractors do business with their supply chain.

Continued commitment

Having implemented a best practice ‘Fair Payment Charter’ and applying these principles to their own payments to suppliers back in 2011, Network Rail describes the decision to formalise this regime for CP6 as ‘the next natural step’ and something their major contractors support.

Stephen Blakey, Commercial Director, Network Rail said: “The Fair Payment Charter was about recognising that cash flow is the ‘life blood’ for every supplier by committing to pay for goods and services in a fair, predictable and timely way. Harnessing the support we have already received from our major suppliers, we have simply taken the next natural step and formalised that approach for CP6. Culturally, it sends a huge signal as to the value we place on a sustainable supply chain and the way we want to do business.

“We recognise the challenges faced by smaller suppliers and are in a position to influence the way work on our railway is delivered and paid for. It is in our interest to have a sustainable supply chain at all levels – they are vital to the successful delivery of our projects and the safe operation of Britain’s railway.”

Real benefits

Benefits of the contract changes centre on better protection of lower levels of supply chain. Removing retentions, which withhold large sums of money from sub-contractors until project completion, will place smaller suppliers in a stronger financial position. Being paid promptly, within 28 days of completing work, also means that contractors are owed a smaller amount of money at any one time, again strengthening their cash flow.

“The changes will make a significant difference to smaller suppliers in particular, who rely on regular cash flow to operate successfully. We want to foster an environment that is fair, sustainable and encourages growth; but this is not at the expense of our larger suppliers. The changes are something our major contractors are very supportive of and we continue to work closely with them to help manage this effectively. For instance, we have created best practice T&Cs to adopt with their own supply chain,” adds Blakey.

In further moves to assure cash flow, Network Rail is also introducing the use of project bank accounts on some of its major projects, meaning payments to subcontractors can be agreed by the client and scrutinised more closely. This move will provide greater certainty and reassurance to SMEs delivering work on their projects, as it means payments made to the project by Network Rail are transparent and the distribution of any onward payments to subcontractors is also visible.

The changes provide a standard and level of expectation for anyone working on the railway, especially for the way smaller companies are treated. Blakey goes on to say: “For SMEs, this makes rail very favourable when compared to other UK construction sectors and helps ensure that we remain a client of choice in an increasingly competitive market.”

Support for change

Network Rail’s decision to make these changes has gained support and appreciation across the sector. In recent weeks, they have consulted with their key suppliers to ensure they are on board and appreciate that it is a natural next step in driving industry change.

Alastair Reisner, Managing Director, CECA, said: “Real change in industry requires real leadership. Since its Fair Payment Charter, Network Rail has provided this leadership. It has worked with its suppliers in a managed process to roll out prompt payment and is proving that, where there is a will, clients and industry can work together to axe unwanted and costly retentions.”

James Quinnell, Chief Commercial Officer, Colas Rail, said: “Colas Rail fully supported the adoption of the Fair Payment Charter and embedded such in its supply chain contracts at that time. We therefore welcome Network Rail’s desire to ‘contractualise’ this commitment across its supply chain.”

Steve Cocliff, Managing Director, VolkerRail, said: “VolkerRail has always been an advocate of fairness in everything it does and was one of the first to sign up to the fair payment charter in 2011. We are therefore very keen to support the leadership shown by Network Rail in its goal to abolish retentions and to fix payment terms at 28 days for the vitally important SME community.”

John Cox, Managing Director (Rail), VolkerFitzpatrick, said: “VolkerFitzpatrick, in support of the leadership shown by Network Rail, consider the financial health of our supply chain to be of critical importance to meet our delivery commitments and as such we are fully supportive of formalising our commitment to fixed payment terms of no more than 28 days and the avoidance of holding retentions on our supply chain.”

Andries Liebenberg, Managing Director, AMCO, said: “Network Rail’s introduction of sub contract payment terms and abolition of retentions is wholeheartedly endorsed by Amco. Through this, Network Rail are recognising the value and contribution of the whole supply chain, and extending the collaborative principles already established through the Fair Payment Charter. This is an industry leading example of how to embrace the supply chain and demonstrates how we can all work together to bring efficiency, value, and a great service to our collective stakeholders and customers.”

 

Notes to editors:

  • Retentions exist extensively across UK construction industry as a method for protecting clients from poor workmanship delivered by subcontractors. Typically, these ‘deposits’ equate to anything between 3-5% of the total cost of work delivered, half of which is then released upon completion of a project and the remainder retained for around a year after completion. Retentions represent a considerable amount of money held by larger contractors, which in some cases has been open to mis-management and exploitation, with detrimental effects on smaller suppliers.
  • The fair payment of SMEs working within the construction industry and in particular, the use of retention payments, has therefore long been a topic of conversation and debate; the importance of which was reignited following the liquidation of construction giant Carillion earlier this year. In the rail sector, Carillion’s adherence to the 28 day payment terms meant that money owed to their subcontractors was minimised when they went into liquidation earlier this year.