6 July 2010 | Andy Allen

Prompt payment could soon become a contractual requirement in the UK engineering and construction sector, according to an industry body.

Rudi Klein, chief executive of the Specialist Engineering Contractors Group (SEC), thinks Whitehall officials have become convinced of the need to change the country’s “Victorian” system of paying public sector contractors.

“The government is concerned all previous initiatives to pay suppliers in short periods – from 10 days to five – haven’t worked their way down the supply chain,” Klein told SM. “What they’re proposing is to make prompt payment a contractual obligation.”

Under a reformed system contractors will have to provide information on how quickly they pay sub-contractors and whether they pay in full. Poor performance in these areas could be penalised by withholding public sector contracts.

Contractors often withhold payment to sub-contractors for as long as possible. “This will force them to pull their payment socks up,” said Klein.

He believes ring-fenced project bank accounts (PBAs) will probably be introduced. The Office of Government Commerce (OGC) has said such systems could save 2.5 per cent of project costs. Klein said PBAs create savings by reducing money lost through legal disputes that occur as project funds trickle down the supply chain. The London Crossrail project will pay contractors out of such an account, while the Olympic Delivery Authority rejected calls to do so for 2012 venues.

Under the system all contractors receive payment at the same time. “This will cut overheads caused by time wasted chasing payments,” said Klein, adding it would also help sub-contractors maintain apprenticeships and avoid making redundancies.

The OGC confirmed fair payment schemes were under consideration. In a report on fair payment practices under the previous government the OGC said of PBAs: “They generate confidence in both the supply chain and the lead contractor by providing real surety of cash flow for all parties.”