Introduction

The Specialist Engineering Contractors’ (SEC) Group Wales/Cymru represents the largest element of construction (by value) in Wales. Its member organisations – listed on the front of this report – mainly comprise SMEs involved in various aspects of construction engineering from steel fabrication and lift installation and maintenance to mechanical, electrical and plumbing installation and maintenance.

Over the years two issues have given rise to major concerns for these firms – lack of cashflow security and the needless cost associated with wasteful duplication in public sector prequalification processes. SEC Group Wales/Cymru has been working closely with the Welsh Government, Value Wales (the procurement arm of the Welsh Government) and Constructing Excellence Wales to address these issues.

The finance Minister, Jane Hutt AM, who has ministerial responsibility for public sector procurement, is firmly committed to using procurement as a strategic tool to enhance the commercial well-being of Welsh construction supply chains. This, in turn, promotes growth through investment in technology, jobs and training. Amongst measures introduced have been the Supplier Qualification and Information Database (SQuID) which aims to standardise the prequalification process and, from the beginning of this year, the trialling of project bank accounts on three schools projects.

This Report, (which has been compiled by my colleague Sarah Greatorex BA, MA, MBA, SEC Group Executive Secretary,) is in support of the monitoring being carried out by the Welsh Government and Value Wales to assess the impact of measures aimed at improving payment practices and reducing the cost of prequalification.

The survey, upon which this Report is based, covered local authorities, police and fire services in England and Wales, and NHS Trusts in England. The Welsh responses have been extracted for this Report but interesting comparisons are made with responses from the English authorities. Responses to the questionnaire were obtained under the freedom of Information Act since an initial voluntary survey failed to elicit sufficient responses.

Almost a quarter of the £4.3 billion annual spend of the Welsh public sector comprises construction and construction-related activities. In Wales there are approximately 100 public bodies, but not all procure construction. This Report reflects the responses from 16 authorities which do have significant annual construction spends.

In analysing the responses we have drawn up a number of recommendations that are listed at the beginning of this Report. We intend to pursue these with colleagues in the Welsh Government, Value Wales and in the Construction Procurement Strategy Steering Group. I would like to take this opportunity to express my thanks for all the help and support received from the Minister of finance, Nick Sullivan and his team at Value Wales and Milica Kitson, CEO of Constructing Excellence Wales.

Executive summary

During the course of this year (2014) the Specialist Engineering Contractors’ (SEC) Group conducted an extensive survey of prequalification and payment practices in England and Wales in non-central government public bodies. The questionnaire is attached as Appendix 1. These included local authorities, NHS Trusts, and Police and fire authorities. That survey is reported on separately.

Since the responses to the survey in Wales were different from those in England, it was considered useful to analyse the Welsh responses separately. It was found that overall there is more interest in project bank accounts in Wales, and that most authorities are using the SQuiD system as a basis for their procurements. This may well reflect the Welsh Government’s commitment to improving procurement practices and promoting the use of project bank accounts. Most of the responses came from local authorities. NHS Trusts in Wales have not yet been approached. A full list of Welsh participants in the survey can be found in Appendix 2.

The highlights of the Welsh survey are:

  • Widespread awareness of project bank accounts and their increasing use in public projects
  • Widespread adoption of the SQuID pre-qualification system as promoted by the Welsh Government
  • Fifty-six percent of the Welsh public sector bodies responding to the survey have monitoring arrangements in place to track payment performance in the supply chain
  • Only one third of the respondent public bodies are adhering to the payment times in the Fair Payment Guidance published by Value Wales (although all pay their tier 1 contractors within 30 days)
  • With the exception of 2 authorities all authorities deduct cash retentions which are primarily funded by small firms(with approximately £30 million being held at any one time)
  • The overwhelming majority of respondents use cash retentions to finance their other activities and, in two cases, invest the monies

SEC Group has invited the Welsh Government and Value Wales to consider a number of recommendations including:

  • Setting targets for introducing project bank accounts across Welsh public sector construction
  • Introducing legislation to protect cash retentions from payer insolvency
  • Introducing targets for mandating the use of SQuID, the pre-qualification system
  • Setting up an office of Procurement Ombudsman to deal with poor procurement and payment practices

Recommendations

Payment

1. We invite the Welsh Government to seek an explanation from those public bodies which are not monitoring tier 1 supplier payment practices or not taking steps to ensure payments are being made along the supply chain (public bodies which did not respond to the survey should also be asked to indicate the steps taken to promote fair payment along the supply chain).

2. We invite Value Wales to remind public bodies that SQuID pre-qualification requires acceptance of either PBAs (if used) or acceptance that tier 2 suppliers be paid within 19 days of the main contract due payment dates (this should also be cascaded down into sub-sub-contracts so that tier 3 suppliers are paid within 23 days of the main contract due dates).

3. It is suggested that the Construction Procurement Strategy Steering Group and Value Wales agree targets for progressing the use of project bank accounts throughout Welsh public sector construction.

4. We invite the Welsh Government to support transposition into regulation of the option in the revised EU Public Procurement Directives for direct payments to the supply chain in the event of non-payment by tier 1 suppliers.

5. Given the risk to the supply chain of losing cash retentions on the insolvency of a tier 1 supplier (which risk does not exist for tier 1 suppliers) we urge the Welsh Government and Value Wales as a matter of priority, to: a) amend SQuID to require that tier 1 suppliers protect cash retentions by issuing a bank guarantee or placing them in trust; and b) introduce legislation (as exists in many other jurisdictions) to protect retention monies.

Prequalification

6. We invite Value Wales to set phased targets for mandating the use of SQuID (without amendment or additions unless there are demonstrable overriding reasons for so doing) throughout Welsh public sector construction so that it becomes the exclusive prequalification route up and down the supply chain.

7. We invite Value Wales to make available guidance to public bodies on the actions those bodies can take against those suppliers failing to comply with the SQuID requirements

8. In order to avoid unnecessary time and cost incurred by firms in having to repeat or replicate the information required for prequalification purposes, we propose that Value Wales should hold one database for all such information.

9. To ensure high standards of technical proficiency and competency we suggest that Value Wales encourages all public bodies in Wales to select only firms which have demonstrated their technical proficiency through independent vetting by trade association or similar schemes (this must apply up and down the supply chain).

Dealing with poor practice

10.We urge the Welsh Government to give consideration to setting up an office of Procurement Ombudsman similar to the Canadian model.

Extent of monitoring contractor payments to tier 2 contractors

The fair Payment Guidance published by Value Wales in November 2012 stipulates the payment periods for public sector construction.

The Guidance advises that the supply chain is made aware of the main contract payment dates and adds:

“Construction procurers in Welsh Government departments, local authorities and other relevant bodies in Wales, need to ensure that their contracts with suppliers include the payment provisions outlined in [the above table].”

These requirements are incorporated in standard clauses published with the Guidance:

“Public sector clients will be responsible for monitoring application of the standard contract clauses by requesting regular reports as appropriate from the relevant main contractor.”

From the end of 2013 the Supplier Qualification Information Database (SQuID) also required that tier 1 contractors commit to paying their supply chains within 19 days (unless a project bank account is intended to be put in place).

The results of the survey suggest that progress has been made by public bodies in monitoring tier 1 contractor payment performance. Despite the fact that the Welsh sample is much smaller than that for the whole of England and Wales, it is significant that more than half of the Welsh respondents monitor what is happening to payments down the supply chain; whereas only a quarter of those in the larger combined survey reported that they did this.

Welsh public bodies have various methods of checking. for at least half of those who do monitor, it is a requirement of the prequalification process that payments will be monitored. The other half requires compliance with the fair Payment Charter, or payment performance is followed up in monthly project meetings. It is assumed that the reference to the fair Payment Charter is to the Charter published by the (then) Office of Government Commerce in 2007.


Fig. 1: Proportion of public bodies which monitor payment

Other steps taken to ensure payment down the supply chain in the absence of regular monitoring

In the absence of regular monitoring, most public bodies rely upon their Tier 1 contractors complying with the payment commitments in SQuID.

There is clearly further progress to be made.


Fig. 2: Reliance on SQuID

The public bodies which do not monitor payment performance at all are listed below.

Mid and West Wales fire and Rescue
North Wales Police
Vale of Glamorgan Council
Ceredigion Council
Merthyr Tydfil Council
Neath and Port Talbot Council
Wrexham Council

It is interesting that Ceredigion County Council refers to the requirements in SQuID.

Further research may be necessary to establish the actions taken by public bodies where there is non-compliance by Tier 1 contractors with the SQuID requirements. Perhaps there should be a standardised approach through guidance from Value Wales.

Public bodies could make direct payments to sub-contractors in the event of non-payment by a tier 1 contractor. Such option is available to be taken up by member states following revisions to the EU Public Procurement Directives. However, the option must first be transposed into regulation.

Average time taken to discharge payment to main contractor

The table below sets out the average times taken by each respondent to the survey to pay their tier 1 contractors:

Fig. 3: Number of days taken to pay main/direct contractors

In Wales, as in the main survey, the majority of organisations pay within 30 days (see fig 3. above). However only five of the public bodies which responded are paying their tier 1 contractors within 14 days or less in accordance with the Value Wales fair Payment Guidance. The longer that public bodies take to pay the longer that tier 1 contractors will take to pay tier 2 contractors and so on down the supply chain. It seems that many public bodies believe it to be sufficient if they pay within 30 days in compliance with the Late Payment of Commercial Debts Regulations 2013.

Value Wales may consider it necessary to remind procuring authorities of the payment periods in the Fair Payment Guidance and the commencement of such periods.

“Mid and West Wales Fire and Rescue Service pay 71% of invoices within 10 days”

 

“South Wales Police pay direct or main contractors in accordance with statutory requirements, which currently stand at 14 days”

 

“In the last 12 months Gwynedd has paid 82% of its invoices within 14 days.”

Extent of use of cash retentions in works contracts


Fig. 4: Those who apply a cash retention

The extent of the practice of applying a cash retention in Wales is very similar to that in England; the average amount retained is 5%. However the fact that the overwhelming majority of public bodies in Wales still deduct cash retentions is disappointing given progress elsewhere in improving cashflow. Moreover deduction of retention monies signifies a lack of trust which undermines collaborative working. Approximately £30 million of cash retentions will be outstanding at any one time on Welsh public sector construction. The bulk of these monies will have been provided by small firms in the supply chain. Moreover the monies are always at risk because of the possible insolvency of the tier 1 contractor but, on public sector projects, the tier 1 contractor is not faced with such risk. A requirement that retentions are placed in trust or that tier 1 contractors provide a bank guarantee to ensure that the monies will be released to the supply chain should be a pre-qualifying requirement.

Use made of cash retentions while held by public bodies


Fig.5: Uses made of cash retentions

The cash retention is generally retained in cash balances until it is due for release to the lead contractor. Until then it is – presumably – used to fund other activities. Less than a fifth of public bodies keep it in a ring-fenced account (i.e. in the client budget). One authority, Denbighshire County Council, states that it deducts notional amounts from contractor payments rather than a retention; this appears to be a retention by another name. Of some concern is that two authorities (Monmouthshire County Council and South Wales fire and Rescue Service) appear to use the cash for investment purposes. This is unlikely to be greeted with acclaim by small firms which fund most of the retention.

“The construction sector in Wales is largely dominated by small to medium enterprises (SMEs), many of whom play critical roles through the supply chain in delivering our public sector contracts. Access to finance and cashflow are vital to smaller sub-contractors and it is only fair that they receive prompt payment in accordance with contract performance.”

Jane Hutt, Minister for finance when announcing on 14 January 2014 the three projects that were to pilot project bank accounts.

Use of project bank accounts

The development and use of project bank accounts (PBAs) in Wales, with the support of the Welsh Government, can be seen to be the way ahead for England and Wales in general. To date PBAs are the most effective method of ensuring that there is both regular cashflow and that due payments are protected against upstream insolvencies. for public bodies PBAs provide greater transparency over the payment process and remove the need for detailed oversight of payment performance along the supply chain.

Whereas 40% of the bodies questioned are aware of and are actually pursuing PBAs as a goal, a mere 8% overall in the whole of England and Wales are doing this. Many respondents from Wales indicated that they feel under pressure from the Welsh government to adopt PBAs. Those who are not yet using them are aware of them, but often feel that their projects may be too small to warrant the use of a PBA. Guidance on PBAs recently published by Value Wales indicates that often the duration of a project is more relevant to the decision whether or not to have a PBA rather than size of project; for a project of very short duration a PBA is unlikely to be necessary.


Figure 6: Use of PBAs in Wales

“North Wales Police do not currently have Project Bank Accounts in place, although the Welsh Government are piloting project bank accounts from March 2014 for public sector projects over £1 million in value and over 4 months in duration.”

 

“Vale of Glamorgan have looked at project bank accounts and staff have been training. Three projects are being run as pilots through SEWSCAP framework and guidance will then be drafted on their use in Wales.”

 

“Preparations underway to implement project bank accounts in accordance with the recommendations of Welsh Construction Strategy (Monmouthshire).”

General commentary on the responses to the payment questions

It is encouraging that there is currently much deliberation amongst Welsh public bodies on how best to improve cashflow along the supply chain. We consider that much of this is due to the interventionist approach adopted by the Welsh Government and Value Wales. Even if they have not yet taken any action most of those questioned are currently reviewing their practices. The use of SQuID, which addresses payment in the supply chain, helps ensure that subcontractors’ cashflow is improved.

In some cases the contracts are audited regularly to ensure that both main contractors and subcontractors are paid regularly. The fair payment clauses provided by the Welsh Government are in a number of cases incorporated into contracts. It is not clear whether or to what extent public bodies are prepared to take action against firms guilty of poor payment practices.

Standardising the prequalification process

In England and Wales in general we noted a gradual trend towards adopting PAS 91 or a modified version of it within the next few years. Many authorities have used PAS 91 as a basis for their own prequalification questionnaire.

None of the 15 Welsh respondents to the pre-qualification questions have any plans to use PAS 91 as they are almost all committed to the Welsh Government’s SQuID prequalification questionnaire. Two of the 15 (Vale of Glamorgan, Mid and West Wales fire and Rescue Service) reported that they use Constructionline. Applying SQuID as the standard approach to supplier qualification in Wales was a key objective in the Procurement Policy Statement launched by the finance Minister in December 2012.

An oft-repeated complaint from small firms in Wales is that they are often required to input the same information many times over. To avoid this, it is suggested that the relevant data is held by Value Wales to be accessed by public bodies at pre-qualifying stage for each procurement.

Ffirms in membership of the SEC Group member associations in Wales will have undergone rigorous independent checks on their technical proficiencies and competencies. It is suggested that Value Wales encourages all public bodies to insist on the use of such firms up and down the supply chain.

Conclusion

It can be seen that procurement in Wales is in a better place than that for England and Wales as a whole. The Welsh Government has been extremely pro-active in improving the payment culture in Wales and in reducing waste and duplication in the prequalification process through promoting the use of SQuID. The Welsh Government’s announcement earlier in 2014 that it intends piloting PBAs on three schools projects appears to have encouraged public sector clients in Wales to take up this option. SEC Group Wales has been actively involved in this process and remains committed to working with the Welsh Government, Value Wales and Constructing Excellence in Wales in adopting forward-thinking practices that support SMEs in Welsh construction.

Within construction there exists a general climate of fear which prevents firms from complaining about bad practice. Currently complaints can be directed to Value Wales but we are not aware of any firm which has heard of this facility. Even so firms would be reluctant to use this because of their overriding need to preserve their anonymity. Inevitably, the investigation of complaints is likely to require that the complainant be identified at some point.

We believe that there is a case for the creation of a Procurement Ombudsman. In March 2012 the Institute for Competition and Procurement Studies at Bangor University submitted a paper to the Welsh Government which referred to the role of the Canadian Procurement Ombudsman. This role is a pro-active one. The Ombudsman promotes fairness, transparency and openness in public sector procurement through, amongst other things, publishing guidance, reviewing procedures and monitoring procurement practices. The Scottish Government is currently giving consideration to this option. The Welsh Government could decide to get there first.

But further work needs to be done if we are to significantly reduce the incidence of poor practice and, thus, achieve a more cost effective and collaborative delivery process. We encapsulate this in our recommendations at the beginning of this Report but, as a matter of priority, we suggest that consideration is given to how we can best protect supply chain retentions and how we can deal with those – whether public bodies or firms supplying to the public sector – who perpetuate bad practice.

It is imperative that supply chain retentions are protected. In many other jurisdictions there exists legislation to protect retention monies. for example, in the majority of the States in the United States, legislation exists to limit the time over which retentions are held or to require that retentions are kept in trust.

Resources