Digital Project Cashflow Management
- BIM marks only the beginning of the construction industry embracing the positive disruptive effects that technology will have on both the technical and the commercial reality of construction projects. However, at present digitisation seems to apply to only one side of the delivery equation leaving the other side – project cash flow management – to the whims of analogue forces. So far the benefits of a digital project cashflow plan has not been widely understood.
- Increasing the use of digital technology in government construction is a strategic priority in the Construction Strategy recently published by the Infrastructure and Projects Authority.
“Using digital technology has been shown to facilitate collaborative approaches to drive innovation and reduce waste”.*
- There is now an opportunity for HS2 to trial digital project cashflow management techniques and technology in order to stabilise supply chains and de-risk projects. As a prerequisite to a short presentation, this paper sets out some thoughts on how this could be developed.
Development of a digital project cashflow plan
- The first step is that all project participants (with the possible exception of those with contracts of small value or of short duration (45 days or less) should operate their contractual payment processes through an online portal to enable the cashflow plan to be managed in a transparent way. Payment periods and critical statutory dates such as due and final dates for payment and dates for issuing statutory notices should be made available on a project platform or extranet.
- Such platform or extranet need not be confined to payments at commencement of on-site work. It could facilitate payments for pre-construction activity especially off-site fabrication and design services. For some trades such as steel and lifts, up to 80% of their contract values are in materials and components manufactured off site.
- The next step is the development of a specification for the platform. This should principally include:
- a description of the cashflow processes contractually envisaged;
- corresponding work flows;
- defined access and security rights; and
- Integrity in independence.
- It would be expected that responsibility for procurement and setup would lie with HS2. However, responsibilities for operation, technical integration, maintenance and uploading would be better served by a third party technology provider with the specialist knowledge required.
- Obligations relating to inputting of data for and by project participants and restrictions on access should be clearly set out in the Contract Data at tier 1 contractor level and at relevant levels of contracting along the supply chain. However, it should be noted that whilst there is a need to incorporate the requirement for digital project cash flow management within the contract, this solution is principally not of a contractual nature.
Operation of the platform
- It is expected that at the outset, data would be inputted by HS2, the tier 1 contractor and the specified supply chain firms. This would constitute a continuing obligation so that the data on the platform provides a real-time insight into processing of applications/invoices, whether notices have been issued, cashflow movements and blockages.
- As a minimum the data would include (in relation to the contracts subject to the platform):
- application dates (including any issues which constitute conditions precedent to payment);
- assessment dates (and verification processes relating to payments for pre-construction activity);
- payment due dates;
- dates for issuing payment notices and identification of party responsible for issuing the notices;
- dates for issuing any pay less notices;
- final dates for payments.
- The platform could then operate as a transaction engine in accordance with the Amazon model. Project participants would be able to have access to establish at any point in time progress on their payment claim. Any delays in progress would become immediately visible to all, enabling the relevant parties to take immediate action to resolve the difficulties, whether they are of a procedural, technical or evidential nature.
PBAs and digital project cashflow management
- A digital cash management process would complement the operation of project bank accounts (PBAs) by improving transparency throughout the supply chain. The experience to date of some PBA projects suggests that supply chain firms are not sufficiently informed of when payments are made into the PBA and the amounts which the bank has been instructed to pay them. Having early warning of these matters would facilitate rapid resolution of problems that may have resulted in any under-payments.
Benefits to HS2 of a Digital Project Cashflow Plan
- The effort invested in ensuring that delivery of the physical product is made as efficiently as possible should equally be applied by project participants to the commercial processes. A digitally managed project cashflow process produces efficiencies through increased collaboration and early resolution of discrepancies, disputes or differences.
- Having a digital cashflow process in place provides a risk management tool. Blockages in the system, misunderstandings over entitlement and resultant delays can be highlighted as soon as they arise and action taken to mitigate any disruption due to threats of suspension and possible insolvencies. The instability which commonly exists within the supply chain due to high fragmentation and disaggregation is exponentially reduced and managed through the open and transparent platform.
- Regulation 113 in the Public Contracts Regulations 2015 requires contracting authorities to ensure that clauses are inserted in all contracts (down to tier 3 contracts) to the effect that payments will be made within 30 days. A digital cashflow management system is the lowest cost method of ensuring transparent monitoring and enforcement of this requirement.
- HS2 already intends to put in place analogue monitoring and auditing arrangements to ensure fair payment along the supply chain. A digital cashflow plan would be an efficient and effective method for delivering this without the extended and exacerbated costs involved in completing physical audits.
- In January 2015 the National Audit Office published a report, Paying Government Suppliers on time, which heavily criticised the failure by public sector clients to collect data on payment performance (especially in the supply chain). A digital cashflow facility will enable HS2 to collect the necessary statistics and develop benchmarks in order to ensure continuous improvement in both its procurement decisions and its contractual supply chain management techniques.
Benefits for project participants
- All firms will be better placed to improve the efficiency, certainty and stability of their cash management processes. This will be primarily achieved through having increased awareness of progress in relation to their payment entitlements rather than having to wait until the statutory final date for payment to discover the amount they will actually be paid and the corresponding justification for that amount (if any). Having an ability to regularly access the platform in order to update themselves on progress will help facilitate early resolution of log-jams and, therefore, a more collaborative approach to resolving differences over entitlement.
- Given the greater certainty of timing and entitlement, firms will be in a stronger position to justify expected cash throughput when borrowing from financial institutions, selling debt or seeking to obtain credit insurance. Moreover they are more likely to be better-placed to assess their future borrowing requirements.
- The process will lead to increased trust in the supply chain which will, of course, encourage greater collaborative effort. This, in turn, reduces wasteful activity associated with parties adopting adversarial postures leading to prolonged and overly complex disputes. This can allow for supply chain effort to focus on what’s good for the project.
- The greater transparency with regard to payment performance will help in applying pressure on project participants to continually improve their payment performance. This should lead to reduced payment timescales and greater certainty of cashflow.
- A bespoke platform could be developed to be trialled on a few projects with the aim of eventually having a standard platform for all projects. However this could be cost prohibitive. As already mentioned the starting-point is to devise a specification for the platform.
- There are range of existing products on the market designed to fulfil these requirements, but each solution is designed from a different angle. Many lack the ability to integrate with other existing construction-related financial and ERP (enterprise resource planning) software products.
- A key “player” in this regard is ORACLE, a US company. Some local authorities already use ORACLE to provide supply chain firms with data on progress of their invoices or applications. The ORACLE product may require adjustment to take account of HS2’s needs.
This paper was prepared by Rob Driscoll, Solicitor and In-House Counsel to the Building Engineering Services Association and Professor Rudi Klein, Barrister, CEO, Specialist Engineering Contractors’ Group.