Interviews

Approaching the tipping point on fair payment

The Fair Payment Charter is driving better practice across the supply chain. RTM spoke to Network Rail Infrastructure Project’s commercial projects director, Stephen Blakey, about the charter’s progress.

Getting paid on time is one of the most important – and trickiest – elements of contracts across the rail supply chain. Network Rail has been working to improve its relationship with both tier 1 and tier 2 suppliers; a challenge that is seeing new ways of working cascading throughout the industry.

Stephen Blakey, commercial projects director at Network Rail Infrastructure Projects, talked to RTM about the Fair Payment Charter (FPC), just over two years on from its implementation.

The voluntary charter was launched on 11 November 2011 with the support of the top 30 tier 1 contractors. But Blakey said: “The target beneficiaries are actually the tier 2s.”

Fair payment is supported by a commitment to pay tier 2 suppliers no later than 28 days after the point at which the tier 1 company applies for the money. The charter also encourages a regime in which the tier 1s aim to reflect the retention regime in place between them and Network Rail in their subcontracts.

Changing payment habits

Since its launch, Network Rail has carried out research to understand the level of awareness about the charter in the industry.

“What are the payment habits that are going on and how many of the standard terms and conditions have been amended to support the payment regimes that we’re looking to put in place?” Blakey asked.

Responses from over 130 individuals, representing a broad range of contractors, including the ‘big six’, showed that over 90% had heard of the FPC and 75% knew that the length of payment was being shortened to 28 days.

Network Rail is also holding up its end of the deal; at the same time as the launch of the charter the company shortened its standard payment terms from 56 days to 21. Blakey said: “For most of our contracts, we are meeting, or very close to meeting, that 21 day payment regime.”

The survey also showed that 58% of contractors reported changing their terms and conditions to base their subcontracts on the charter. For the remainder, Blakey pointed out that a proportion would be older contracts that would not be covered by the new guidelines.

“We never sought to retrospectively apply the principles of the fair payment charter. If you’re working on contracts that were let before then, they may well have been let under the old regime.”

Back-office barriers

The survey also investigated tier 1 contractors’ perceptions of the biggest barriers to implementing the FPC. They reported that the largest single reason was late applications from the sub-contractors.

Tier 1s also cited finance system problems, with back office IT systems and processing payment schedules needing to be aligned for a joined-up result. This could stem from instances where the charter is being implemented sporadically, with parts of the system set up for one-off payments rather than a change to the structure of their payment procedures.

“There’s a dependency in terms of the processing which goes on from finance and they haven’t got around to doing their bit; either because they don’t know about this, or they might have changed it in a staccato way for those jobs where practitioners have contacted them to say they need to change it, but they haven’t systemically changed the default payment regimes,” Blakey said. “Until they get to a systemic change in back-office functionality, you don’t get to the wholesale change. That is a factor that would slow down industry deployment.”

Must try harder

At this last summer’s six-monthly tier 2 conference, hosted by Carillion, one of the strong messages was that tier 2s were not enjoying the cashflow benefits they should, because “the tier 1s were not ‘walking the talk’ of the Fair Payment Charter.”

This feedback was taken to the Commercial Director’s Forum (CDF), after which the survey was undertaken to “turn anecdote into information”. The November meeting of the CDF saw “unanimous acceptance that we are not doing well enough as an industry”.

Blakey explained: “No-one has changed their mind, or doesn’t think it’s the right thing to do. But we recognise that we need to support its propagation quicker and faster.”

Adoption of the charter is “gathering momentum in the right direction”, he said. The charter itself and the tier 1 survey of its application will be reviewed in February, with more tier 2s encouraged to give their views so these results can be compared.

Tipping point

There will come a ‘tipping point’, Blakey said, where having the majority of subcontracts processed in the new way will lead to changes in operational practice.

“This is all about making the regime articulated in the Fair Payment Charter the norm. It’s not the norm yet, because we’re still going through the roll-out and the introduction to business and it won’t be perfect.”

Blakey described the charter as one key element of the wider Network Rail move towards collaborative working and long-term frameworks (more on page 46). “We’re driving industry change. This is about the growing pains of turning it from something that’s new into something that’s the norm. We have issued a call to arms to our tier 1s to do better in this regard, which they’ve accepted.”

‘Progressive collaboration’

The charter ties in with Network Rail’s national strategy for CP5, with greater moves towards collaboration and mutual dependency. New forms of “progressive” contract will have more emphasis on best value, rather than simply lowest cost.

It will see more long-term frameworks with “committed values” to support continuity of resource, investment, and safety. With this commitment, businesses can plan further ahead in terms of work, with the same staff doing the same work for long periods of time to improve performance.

This approach will lead to less re-tendering and fewer opportunities at the tier 1 level, since so much work will have been let in advance, or via frameworks – but there will be greater continuity, with implications for both the workforce skill level and performance.

He said: “They can also do things like decide to employ people directly for longer, rather than trying to deal with the peaks and troughs of contingent labour.”

Over 80% of the work in CP5 is expected to be delivered in contracts that support collaboration, and by the end of summer 2014 over 60% of Network Rail’s procurement for the period is expected to be complete.

Dependent performance

An industry tier 2 conference will take place on 3 February, hosted by Amey, to “re-energise” the application of the Fair Payment Charter and encourage greater engagement between the tiers.

Blakey said: “If we believe that our performance is dependent on the tier 1s’ performance, we also know that over 50% of the spend will go from the tier 1s to tier 2s. The tier 1s’ performance is dependent on the tier 2s’ performance. Whilst there’s more to do, we think we’re in the right space with our relationship with our tier 1s to more overtly start to have a coordinated engagement with the tier 2s.

“If it’s right and proper to have longer-term frameworks with fewer suppliers to promote continuity and performance in the dynamic between tier 1 and clients, it will be probably be a very similar dynamic in the relationship between the tier 1 and the tier 2s. At one level it’s obvious, but the difference here is we haven’t sat unilaterally and come up with this, we’ve come to that as an answer in dialogue with the tier 1s, primarily in the CDF.”

The conference will seek to boost engagement between the tiers and provide reaffirmation to the tier 2s especially that “this is serious”. Blakey told us: “It’s not a flash in the pan and we will continue to drive it.”

The right message

Blakey emphasised that Network Rail was not trying to do this engagement work on behalf of the tier 1s, but in concert with them. It differs from the approach taken by TfL, where the organisation is engaging directly with tier 2s and 3s.

“That’s not what our strategy is about. We don’t suggest that we may never do it. There may be instances where it’s in our interests to engage with a specialist tier 2 contractor directly, but our focus is on cross-tier collaboration.”

Signing the charter will remain a voluntary act; Blakey noted that “one volunteer is worth ten pressed men”. This has an impact on the speed with which the charter can be rolled out, but allows Network Rail to maintain its value.

Blakey suggested that TfL is also looking into adopting the FPC or its principles for appropriate suppliers, though TfL had not confirmed this with RTM at the time of going to press.

Blakey  said: “If we were to become a policeman on this, we’d lose some of the value. We’d lose the opportunity to be seen as collaborative with our tier 1s, and become enforcers. That’s the wrong message.”

Not a panacea

There have been misunderstandings of the charter, with some contractors believing it will solve all their payment problems at once. The charter focuses on speed of payment, not the value of the payment itself.

It does however include an obligation to be fair and reasonable when deciding on payment, without vexatious or ill-advised deductions or withholdings, and calls for swift payment even in the event of a disagreement.

Blakey explained: “Someone will say ‘you owe me ten’ and they will say ‘no, we owe you six’. In those instances, the charter says that if you form that difference of opinion you shouldn’t just pay nothing until there is an agreement; you should pay six. And when you decide that you’re paying six, you pay it quickly.”

But this misconception has led some sub-contractors believing that because of these instances, the charter is not working.

“It isn’t a panacea for solving disagreements on entitlement, but it is a step-change in the way our industry wishes to do business and a cornerstone in our pursuit of effective collaboration,” Blakey concluded.