Supply Chain Charter - DOC

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					                                        A Critical Look
                                   The Guide to Fair Payment
                                          Giles Dixon

The Guide to best ‘Fair Payment’ Practices, which includes a Fair Payment Charter, was
published last year by the Office for Government Commerce (OGC) and from 1st January 2008 it
came into force for all public sector works contracts. While not aimed at the private sector, the
issues are essentially the same for both public and private sectors.

There is no doubt that poor payment practices have bedevilled the construction industry for a long
time. But a lot has been done to improve things in recent years. Since Sir Michael Latham’s
1994 report, Constructing the Team, highlighted the problems, we have had the Housing Grants,
Construction & Regeneration Act 1996 to prohibit ‘pay when paid’ clauses, and introduce
mandatory payment and withholding notice requirements. More recently, in 1998, the Late
Payment of Commercial Debts (Interest) Act was passed, giving an unpaid supplier the statutory
right to claim interest on late payments; and partnering contracts with good faith obligations and
open book accounting have become increasingly common in the past few years.

So it may be asked why a Fair Payment Charter is considered necessary now – especially since it
is aimed at Government Departments, and if any client can be expected to treat its contractors
fairly, it should, surely be for the public sector to lead by example.

The answer is, firstly, the OGC Guide is aimed at ensuring fair payment throughout the supply
chain, and, secondly, the OGC estimate substantial savings for the public sector – 2.5 % of
construction costs – up to £750 million a year – if their principles are adopted. Whether this
figure stands up to scrutiny is another matter – if main contractors are deprived of a cashflow
benefit by sitting on funds they may need to increase their prices to compensate.

The OGC Guide is in three parts:

         First, they recommend a Fair Payment Charter is adopted for each project. The
        Model Form is to be signed by the client and main supply chain members but it is non-
        binding. See box at end

        Second, they recommend a number of Fair Payment practices to be adopted. These
        include use of milestone payments and payment schedules to simplify the payment
        process; open book accounting; establishing a 30 day payment cycle for both main
        contractor and 1st & 2nd tier supply chain

        Third, and most important, there are detailed proposals for a Project Bank Account, to
        be set up by the client and from which payments will be made direct to all the main
        participants in the supply chain –i.e. avoiding the pass-down of money from client to
        main contractor to subcontractors etc.

Looking at these in turn:

Fair Payment Charter. A primary purpose of a contract is to set out the payment terms. So
why bother with a non-binding ‘charter’ when there is a binding contract? Much better to have

appropriate legally binding contract terms and make sure they are implemented. As for ensuring
that subcontractors get fairly treated, the main contract can itself require that fair payment terms
are included in all subcontracts. This is already the case with some standard forms – e.g. the
JCT-Constructing Excellence Contract. In addition the employer could, as a contract term,
require evidence from the main contractor that those terms are being adhered to as part of the
certification process.

Fair Payment Practices. There is, frankly, nothing new here and most of the ideas are already in
use, at least with more enlightened employers. If anything they are rather weak: retention, for
example, is an unnecessary and irrelevant practice when a contract contains a payment schedule,
as a number of standard forms already do.

As for the Project Bank Account, this is of more interest but it is not new: it was first
promulgated in the SEACC Contract published by the Electrical Contractors Association in 1993
and promoted in the Latham Report. The OGC model is less comprehensive but aims to do much
the same. A project bank account will be opened by the client. Each month, as well as applying
for its interim payment from the client, the main contractor will prepare a breakdown of the
payments to be made to itself and the supply chain. The client will pay the interim sum into the
project bank account and the joint signatories on the account – client and main contractor – will
then authorise the bank to make those payments.

The beneficiaries will be the key members of the supply chain and all of them will be required to
sign a trust deed. The trust status of the account is intended to avoid potential problems if the
contractor goes into receivership. The account in effect is held in trust on behalf of the whole
supply chain.

Even with these arrangements, problems can still arise – not least because the main contractor has
the ability to authorise a lower payment to its supply chain than is justified. And the introduction
of a trust deed and, in consequence, trust law into the construction system will involve more
paper, more training and more complexity.

NEC and PPC2000 have recently issued their own version of the Project Bank Account and
related documents and JCT are considering issuing d to members of his supply chain rests
entirely with the main contractor, so it is open to question whether any real benefit is achieved.

In summary, while there is a lot of good sense in the OGC Guide, it is not going to solve all the
payment problems and, to my mind, it would be easier to ensure that

(a) a fair form of main contract and subcontract containing collaborative principles is used by all
parties in the project and

(b) implementation is monitored by the client, and

(c) failure by any tier of contractor to pay promptly is penalised by the client – either through
financial sanctions or by not inviting the contractor to tender for new work

                             The Fair Payment Charter – A Summary

       Companies have the right to receive correct full payment as and when due. Deliberate
        late payment or unjustifiable withholding of payment is not acceptable.

       ‘Fair Payment’ will apply throughout the supply chain.

       The process will be transparent so that everyone knows how much and when they will be

       Companies will consider operating relevant contracts on an open book basis.

       The correct payment will represent the work properly carried out, or products supplied, in
        accordance with the contract. Any arrangements for retention will be replicated
        throughout the supply chain. Any withholding of payment due to defects or non-delivery
        will be proportionate and demonstrably justified.

       All contracts will provide for regular payments with payment periods not exceeding 30

       The client and all supply chain members will agree payment procedures at the outset
        using electronic BACS transfer.

       Monitoring, auditing and problem resolution procedures will be agreed.

Giles Dixon
June 2008

Giles is a solicitor with his own one-man practice, specialising in construction and projects. He is
co-author of the JCT Constructing Excellence Contract and was involved in drafting the SEACC
procurement system. He is also MD of, a website selling legal documents


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