Main contractors withholding payments from subcontractors are guilty of “organised crime” a committee of MPs has been told.
The Federation of Small Businesses (FSB) has this week been giving evidence to the All Party Parliamentary Inquiry into Late Payments to SMEs.
The MPs also heard claims that contracting giants draw up standard contracts which are onerous and designed to offload risks and cost burdens onto subcontractors.
Steve Paul, managing director of Staffordshire-based SDP Floor Screeds, recalled how main contractors withholding payments totalling £1.2m had sent his separate plastering business, which he had built up over 25 years, into administration.
“It’s organised crime really, they know what they are doing and they are playing with us. They hung me out to dry.”
Steve Sutherland, chair of Huddersfield glazing contractor Dortech, told MPs he had been owed £500,000 from a major international corporation, comprising numerous small payments and retention payments, before reaching a settlement which still left him £192,000 out of pocket.
He said because most of the payments withheld were around £5,000 the costs of adjudication made it uneconomic to fight for them. He said the contract terms were “onerous” and pushed all risk down the supply chain.
Steve, who hit out at the payment practices of large firms, claiming they try to squeeze money from subcontractors to cover the costs they incur from underbidding on prices to win projects, said:
“If you read their contract you would say you would be mad to work under this, but you work on it because you have done it for a long time and there has never been a problem, so you do it on trust.”
The committee also heard that many giant contractors make unilateral decisions to extend their payment terms to as much as 120 days as a means of maximizing reserves and limiting their own need to borrow from the banks.
The committee is investigating fair payment across all sectors of the UK economy and is led by Labour MP Debbie Abrahams who is a campaigner for fairer and faster payments to SMEs. The inquiry is due to publish its recommendations this summer.
Debbie Abrahams, MP for Oldham East and Saddleworth, who chaired the inquiry as part of her Be Fair – Pay on Time campaign, said:
“The standard of the testimony from our witnesses at the inquiry was excellent and really gave our cross-party panel of MPs a clear, and sometimes emotional, picture of the scale of the late payments problem.
“Rather than viewing fair payment terms as part of their corporate social responsibility many large companies are deliberately paying late or extending their pre-agreed payment terms simply because they have the power to do so.
“Having said that, both HSBC and Barclays did present the inquiry with robust verbal testimony, that they take the welfare of SMEs very seriously, and said they would look again at the how they monitor payments right the way down their supply chain.
“Credit should also go to the SME owners who were brave enough to talk publically about the problems they have encountered. Although all business sectors are affected by this issue they really did paint a very stark picture of the practices that seem commonplace in the construction industry.
“We owe it to our SMEs and entrepreneurs to treat them fairly. We can’t, on the one hand, say it’s them who’ll get us out of this recession but then, on the other hand, stand by and do nothing to protect them from larger, more powerful companies who misuse their power.”
Gordon Millward, FSB Regional Chairman said:
“We very much support the work of Debbie Abrahams MP to tackle late payments, one of the biggest challenges for small firms. The cross-party evidence session in Parliament was timely and the FSB was very pleased to contribute. We particularly welcomed the focus on recommendations to address this entrenched issue.”