Small construction firms to suffer from change to payment terms

3 July 2009

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A FTSE-listed construction company that claims one of its ‘core values' is to make its suppliers more profitable is doubling the time in which it pays them.

Rok plc, which says that, in addition to satisfying its customers' needs, its aim is to "improve [its] long term profitability and that of [its] supply chain colleagues," is being entered into the FPB's Hall of Shame after extending its standard payment terms from 30 to 60 days for new contracts with sub-contractors and consultants.

The FPB has written to the company inviting it to sign up to the Government's new Prompt Payment Code, where companies pledge to "pay suppliers on time without changing practice on length of payment for smaller companies on unreasonable grounds".

"Small businesses are bearing the brunt of the slump in the construction sector. It is not reasonable for big businesses to pass on costs incurred via changes to payment terms and conditions further down the supply chain," said Nick Palin, the FPB's Director of Finance and Administration.

"In the current economic climate, this behaviour can force small firms to cease trading altogether. The FPB is campaigning to change the culture of poor payment in the UK and is urging to Rok plc to sign up to the Prompt Payment Code."

The 60-day standard payment will apply to all future agreements "which if not refuted in writing within seven days of its receipt will be deemed effected," according to a letter, seen by the FPB, which was sent by a subsidiary of Rok plc to sub-contractors and consultants on 22 June 2009.

A spokesperson for Rok plc, who confirmed that the company had changed its standard terms to 60 days for all new agreements, alongside other companies in the construction sector, told the FPB that the letter was sent out in error, was not of the ‘usual Rok language' and did not reflect the ‘true situation'.

Despite Rok plc suggesting that suppliers can refuse to accept the contractual changes, most smaller businesses feel they have few alternatives to suffering in silence.

One FPB member, who wished to remain anonymous, said: "The company has said that these new terms and conditions will apply unless there are objections to them, but, in reality, how can you stand up to a business of Rok's size? There's no doubt that many smaller sub-contractors and their suppliers will struggle as a result of this move, but speaking out will simply result in Rok refusing to work with them again. It's a no-win situation."

Further, under the Late Payment of Commercial Debts (Interest) Act 1998, small businesses have a Statutory Right to Interest (SRI), meaning they can, in theory, charge interest on late payments. However, few take advantage of this or are prepared to speak out publicly.

"In reality, it's an inequality of bargaining power. Most of the firms suffering are very small businesses which simply don't have the wherewithal to replace the bigger clients they do business with," said the FPB's adviser on late payment, Helena Beare, of Qdos Consulting. "Big companies have the power to dictate changes to terms and conditions, and can tell their smaller suppliers to either put up with it or they will take their business elsewhere. That's why it's an inequality of bargaining power – in fact, there is no bargaining power for small businesses."

Rok plc is the latest company to be ‘named and shamed' by the FPB for squeezing its suppliers, joining others including Argos, Matalan and Alliance Boots Ltd in the Hall of Shame. Click here to read Rok's response in full.

In addition to enforcing changes to contractually agreed payment terms and conditions with little or no discussion with suppliers, steep ‘compensation charges' for incorrect information about products or services and late or delayed payment, many companies impose ‘settlement discounts' on invoices. In effect, this means they receive money off if they do pay on time.

Recent research from the FPB shows that late payment is considered by business owners to be one of the most significant barriers to economic recovery. Late payment deteriorated for 57% of the businesses surveyed. Poor cash flow as a result of late or delayed payments was the main issue for 24% of respondents.

Earlier research on payment, carried out at the end of 2008, showed that almost one in three (32%) small businesses were owed between £1,001 and £5,000 at any one time. In addition, 88% said they were not being paid within contractually-agreed periods and 72% said that the problem had a ‘serious' or ‘very serious' impact on their businesses.

The FPB is urging the UK's small businesses to report this behaviour anonymously by calling 01565 634467 or emailing campaigns@fpb.org. For more information on the Government's Prompt Payment code, visit www.promptpaymentcode.org.uk.

Small construction firms to suffer from change to payment terms

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