Specialist contractors have been warned to beware of the “potential pitfalls” surrounding a controversial early payment facility (EPF) operated by Carillion.
A detailed report into the arrangement by the National Specialist Contractors Council (NSCC) has raised “concerns” that subcontractors could be left with payment terms of 120 days if the scheme is terminated.
The NSCC remains an avid campaigner for 30-day payment terms and has previously branded extended payment terms “grossly unfair” to the supply chain.
The EPF, which Carillion has so far used to settle £126m of invoices from more than 200 suppliers, works by using bank finance to pay subcontractors early in return for a small charge.
Carillion says its intention is to pay suppliers earlier under the EPF than they have been previously on its standard 65-day terms, while also allowing subcontractors to arrange their payment dates to suit their circumstances.
From Carillion’s point of view, the set-up gives it greater flexibility in managing working capital.
Under its Supplier Incentive Scheme, Carillion has told the NSCC that it is reimbursing all bank charges paid by suppliers who reduce their actual payment terms to 45 days, however the NSCC notes that this is not contractually documented anywhere.
Therefore, if Carillion reverses this policy, the NSCC said that the bank charges would have to be met by the specialist contractor.
Furthermore, the NSCC said that while termination of the EPF can be made by either party through 30 days’ notice, sub-contractors would be stuck with 120-day payment terms on existing contracts if Carillion ended the sche,e, which could cause them cash flow difficulties.
The NSCC said: “Specialist contractors should be aware that the fact that the Supplier Incentive Scheme is not contractually documented anywhere and may be subject to review ‘in line with market conditions’ means that Carillion could withdraw it at any time or reduce the amounts payable. In this event, specialist contractors would either have to accept payment on 120-day terms or pay bank charges for taking early payment.”
Under the Late Payment of Commercial Debts Regulations 2013, businesses are expected to pay their suppliers within 60 days on private contracts and 30 days on public sector contracts, and will be liable to pay interest, at 8% over base, if they have not paid within the agreed period.
The NSCC said that if Carillion operates the EPF in line with how it has stated then it could be a “p[positive arrangement” for both the contractor and its supply chain.
But it warned: “There are a number of potential pitfalls for specialist contractors and they are advised to check the terms of all the agreements they are asked to sign in relation to the EPF to make sure they are happy with them.”