Specialist contractors are warning that construction is “heading for disaster” unless major contractors change their working practices.

Rudi Klein, head of the Specialist Engineering Contractors’ (SEC) Group, vented his frustration recently in a letter to the Financial Times.

The full letter is reproduced below as follows: 

“Coverage of the Carillion saga exposes the fragility of the finances of the top UK contractors.

They outsource all work to supply chains, mainly small to medium-sized enterprises, and their own weak balance sheets don’t deter them from procuring billions of pounds worth of infrastructure works.

They manipulate their supply chain payments and ensure that their contracts are drafted with all risk transferred to these firms.

Carillion extended its payment periods to 120 days from 65. Currently almost £25bn is outstanding to construction SMEs because of delayed payments.

With the supply chain finance initiative, introduced by David Cameron’s government, companies in the supply chain can access their monies earlier from a bank on payment of a fee.

An unforeseen consequence of the initiative is that large construction companies, like Carillion, can make more money on the back of it.

Cash retentions are also regularly deducted from the supply chain to bolster working capital.

These are monies held back from due payments as security for contract performance.

The top dozen UK main contractors withhold approximately £1bn of retentions from their supply chains.

These practices are key barriers to improving the industry’s performance and productivity.

The Construction Act needs to be tightened up:
* 30 days payment must be mandated across the UK.
* Cash retentions must be protected in a ringfenced account as in many other countries.
* All payments for public sector works must be through a project bank account so that everyone can be paid at the same time.

Unless we now urgently address these problems, the UK construction industry is heading for disaster.“

Acknowledgement: The Financial Times