Carillion’s collapse has exposed the government-backed Prompt Payment Code as “toothless” and raised the need for urgent reforms to tackle late payments, an industry body has said
The Federation of Small Businesses is calling on ministers to mandate that all FTSE 350 companies sign up to a new code with a “three strikes and you’re out rule” to target repeat offenders, who would be stripped of the right to be awarded public sector contracts until their payments practice improved.
FSB chairman Mike Cherry said that despite being a signatory of the code since 2013, Carillion was notorious for late payments, with some FSB members waiting for 120 days to receive funds.
According to the federation’s research, on average 30% of payments to small firms are late, with the average value of each late payment standing at £6,142.
It estimates that late payments cost the UK economy £2.5bn and kill off 50,000 small businesses every year.
“Sadly, this sorry saga has laid bare the frailties of the Prompt Payment Code. While it is fundamentally a good idea, it does not work when it is most needed – as shown with Carillion’s behaviour since July 2017,” Cherry said.
“Although they were signatories of the PPC, Carillion were able to use their dominant position to squeeze smaller firms to mask their own financial failings. This irresponsible behaviour has put many small businesses in jeopardy, with countless people fearing for their jobs.”
Over 2,000 companies have signed up to the Prompt Payment Code. Under its terms, they commit to paying suppliers within 60 days, unless there are “exceptional circumstances”, and to work towards making 30 days the norm.
The code is administered by the Chartered Institute of Credit Management on behalf of the Department for Business, Energy & Industrial Strategy.