Why the sub-contractor prompt pay plan doesn’t go far enough

You’d be hard-pressed to meet a small business owner with experience of supplying the public sector who won’t welcome the government announcing it will bar companies from tendering for state contracts if they fail to pay suppliers on time, writes Adam Home of debt recovery specialists Safe Collections.

As Cabinet Office minister Oliver Dowden MP explained: “We will consult on how to exclude bidders from major government procurements if they cannot demonstrate prompt payment to their subcontractors.”

It is a bold-sounding move that many consider long overdue. Government contracts have become a feeding frenzy for the biggest agencies and outsourcers, who rake in millions at the top of the food chain while subjecting sub-contractors and smaller suppliers to exploitative payment terms. In some cases, these terms translate into predatory payment practices and, in turn, we’ve seen those practices evolve into outright abuses.

So any attempted reform of the chronic late payment culture that blights the economy is to be encouraged. But like so much well-intended government regulation aimed at addressing an age-old wrong, there are big questions over whether it goes far enough.

Because as far as the vast majority of IT contractors are concerned, the issue for them is that the “measures” are only going to cover the main government agency or government supplier. There is nothing in the released detail so far (a consultation is promised) to suggest that the government plans to regulate the whole supply chain.

Those parties unreservedly championing the 'proposals' (the more accurate term in light of an incoming consultation), should remember that, with public sector IT contracts, it can be common for the individual contractor in question not to have a direct relationship with the main government supplier. Partly because of the sheer size of the contracts, the main agency (or recruitment/outsourcing specialist) who wins the tender will often source individual contractors from a number of different agencies, who in turn may use further intermediaries to find contractors who actually do the work.

It’s therefore not unusual to find two, three or even more contractual links in this chain of intermediaries. So, in practice, a clampdown on the payment wrongs of main government contractors will not automatically lead to benefits for end-of-the supply chain, single-person contractor companies.  

The big companies at the top of the chain may be prompted to pay their immediate sub-contractors on time. But that is where the incentive ends -- as they don’t actually hold government contracts, there is no pressure being applied to the intermediaries to treat their suppliers any better. End result? The small contractor at the bottom is exposed to the same level of risk of not getting paid on time -- or at all -- as before.

So we’d like the government to go much further in reforming the entire ecosystem of how government IT contractors operate.  

Yes, the intentions behind the proposed clampdown are good, especially when you consider the government’s goal of having a third of all procurement spend going to SMEs.

And yes, it's commendable that they want main contractors to provide evidence of how they are looking after their supply chain, and they want sub-contractor ‘channels’ for late payments and other poor pay practices to be reported directly to the buying authorities.

But no, late payment culture isn’t just a problem at the very biggest companies. There is a strong sense from the government’s plans (and from my reading of the Cabinet Office minister’s speech on the plans), that the government has been strung into action by Carillion. It’s clear that the aim is to try to prevent any more high-profile abuses from such big-name, government contractors.

Yet to be fair to big companies, they cannot always control what their suppliers and intermediaries do. When it comes to payment – terms, times, treatment and transparency, there is often an attitude problem right the way down the supply chain; it’s top link isn’t necessarily any worse than its third or fourth link.

As well as measures which tackle the actual reality of public sector IT contracts more effectively, we would also like to see reform of the public tendering process itself, so that more SMEs (limited companies and sole traders alike) can get more work directly. It’s obvious but bears repeating to the government -- the longer supply chains are, the more obstacles in the way of cash reaching the small players. And the more opportunities there are for abuse.

So as I’ve said, you’ll be hard-pressed to find a tiny trader with public sector supply-experience who doesn’t support the government’s action to do something in this area -- but the often hard-squeezed IT contractor? They can only hope that this move which fails to take into account the chain of intermediaries, itself causes a chain reaction -- so that one proposed rule for the bidders of major government procurements becomes the same rule for those bidders’ intermediaries.