August 2014

The members of

the SEC Group

Wales/Cymru

are:

Association of

Plumbing and

Heating

Contractors

(APHC)

British

Constructional

Steelwork

Association

(BCSA)

Building &

Engineering

Services

Association

(B&ES)

Electrical

Contractors’

Association

(ECA)

Lift & Escalator

Industry

Association

(LEIA)

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Prequalification in Public Sector

Construction in Wales

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Introduction 2

Executive summary 3

Recommendations 4

Extent of monitoring by public bodies 5

of tier 1 contractor payments to tier 2 contractors

Other steps taken to ensure payment down 6

the supply chain in the absence of regularmonitoring

Average time taken to discharge 7

payment to main/direct contractors

Extent of use of cash retentions 8

in works contracts

Use made of cash retentions 9

while held by public bodies

Use of project bank accounts 10

General commentary on the responses 11

to the payment questions

Standardising the prequalification 12

process

Conclusion 12

Appendix 1: fOI questionnaire 13

Appendix 2: List of respondent bodies 14

Contents

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Construction inWales

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The Specialist Engineering Contractors’ (SEC) Group Wales/Cymrurepresents the largest element of construction (by value) in Wales. Itsmember organisations – listed on the front of this report – mainly comprise SMEs involved in various aspects of construction engineering from steel fabrication and lift installation and maintenance to mechanical, electrical and plumbing installation andmaintenance.

Over the years two issues have given rise to major concerns for thesefirms – lack of cashflow security and the needless cost associated withwasteful duplication in public sector prequalification processes. SECGroup Wales/Cymru has been working closely with the Welsh Government, Value Wales (the procurement arm of the Welsh Govern-ment) and Constructing Excellence Wales to address these issues.

The finance Minister, Jane Hutt AM, who has ministerial responsibility for public sector procurement, is firmly committed tousing procurement as a strategic tool to enhance the commercial well-being of Welsh construction supply chains. This, in turn, promotes growth through investment in technology, jobs and training. Amongst measures introduced have been the Supplier Qualification and Information Database (SQuID) which aimsto standardise the prequalification process and, from the beginning of this year, the trialling of project bank accounts on threeschools projects.

This Report, (which has been compiled by my colleague SarahGreatorex BA, MA, MBA, SEC Group Executive Secretary,) is in support of the monitoring being carried out by the Welsh Government and Value Wales to assess the impact of measures aimedat improving payment practices and reducing the cost of prequalification.

The survey, upon which this Report is based, covered local authorities, police and fire services in England and Wales, and NHSTrusts in England. The Welsh responses have been extracted for thisReport but interesting comparisons are made with responses from theEnglish authorities. Responses to the questionnaire were obtainedunder the freedom of Information Act since an initial voluntary survey failed to elicit sufficient responses.

Almost a quarter of the £4.3 billion annual spend of the Welsh public sector comprises construction and construction-related activities. In Wales there are approximately 100 public bodies, but notall procure construction. This Report reflects the responses from 16 authorities which do have significant annual construction spends.

In analysing the responses we have drawn up a number of recommendations that are listed at the beginning of this Report. Weintend to pursue these with colleagues in the Welsh Government,Value Wales and in the Construction Procurement Strategy SteeringGroup.

I would like to take this opportunity to express my thanks for all thehelp and support received from the Minister of finance, Nick Sullivanand his team at Value Wales and Milica Kitson, CEO of ConstructingExcellence Wales.

Andrew MarchantNational Executive Officer

Specialist Engineering Contractors' Group, Wales/CymruGarden House', Tyle House Close,Llanmaes, Vale of Glamorgan, Cf61 2XZ Tel: 01446 790159 Mobile: 07795 394499Email: andrew.marchant@b-es.org

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Introduction

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During the course of this year (2014)the Specialist Engineering Contractors’(SEC) Group conducted an extensivesurvey of prequalification and paymentpractices in England and Wales in non-central government public bodies.The questionnaire is attached as Appendix 1. These included local authorities, NHS Trusts, and Policeand fire authorities. That survey is reported on separately.

Since the responses to the survey inWales were different from those inEngland, it was considered useful toanalyse the Welsh responses separately. It was found that overallthere is more interest in project bankaccounts in Wales, and that most authorities are using the SQuiD systemas a basis for their procurements. Thismay well reflect the Welsh Government’s commitment to improving procurement practices andpromoting the use of project bank accounts. Most of the responses camefrom local authorities. NHS Trusts inWales have not yet been approached.A full list of Welsh participants in thesurvey can be found in Appendix 2.

The highlights of the Welsh survey are:

n Widespread awareness of project bank accountsand their increasing use in public projects

n Widespread adoption of the SQuID pre-qualification system as promoted by the WelshGovernment

n Fifty-six percent of the Welsh public sector bodies responding to the survey have monitoringarrangements in place to track payment performance in the supply chain

n Only one third of the respondent public bodies areadhering to the payment times in the Fair PaymentGuidance published by Value Wales (although allpay their tier 1 contractors within 30 days)

n With the exception of 2 authorities all authoritiesdeduct cash retentions which are primarily funded bysmall firms(with approximately £30 million being heldat any one time)

n The overwhelming majority of respondents use cashretentions to finance their other activities and, in twocases, invest the monies

has invited the Welsh Government and Value Wales to consider a number of recommendations including:

n Setting targets for introducing project bank accounts across Welsh

public sector construction

n Introducing legislation to protect cash retentions from payer

insolvency

n Introducing targets for mandating the use of SQuID, the

pre-qualification system

n Setting up an office of Procurement Ombudsman to deal with poor

procurement and payment practices

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Payment

1. We invite the Welsh Government toseek an explanation from those publicbodies which are not monitoring tier 1supplier payment practices or not takingsteps to ensure payments are beingmade along the supply chain (publicbodies which did not respond to the survey should also be asked to indicatethe steps taken to promote fair paymentalong the supply chain).

2. We invite Value Wales to remind publicbodies that SQuID pre-qualification requires acceptance of either PBAs (ifused) or acceptance that tier 2 suppliersbe paid within 19 days of the main contract due payment dates (this shouldalso be cascaded down into sub-sub-contracts so that tier 3 suppliers are paid within 23 days of themain contract due dates).

3. It is suggested that the ConstructionProcurement Strategy Steering Groupand Value Wales agree targets for progressing the use of project bank accounts throughout Welsh public sector construction.

4. We invite the Welsh Government to support transposition into regulation ofthe option in the revised EU Public Procurement Directives for direct payments to the supply chain in theevent of non-payment by tier 1 suppliers.

5. Given the risk to the supply chain of losing cash retentions on the insolvencyof a tier 1 supplier (which risk does notexist for tier 1 suppliers) we urge theWelsh Government and Value Wales asa matter of priority, to:

a) amend SQuID to require that tier 1 suppliers protect cash retentions byissuing a bank guarantee or placingthem in trust; and

b) introduce legislation (as exists in many other jurisdictions) to protect retention monies.

Prequalification

6. We invite Value Wales to set phased targets for mandating the use of SQuID(without amendment or additions unlessthere are demonstrable overriding reasons for so doing) throughout Welshpublic sector construction so that it becomes the exclusive prequalificationroute up and down the supply chain.

7. We invite Value Wales to make availableguidance to public bodies on the actionsthose bodies can take against thosesuppliers failing to comply with theSQuID requirements

8. In order to avoid unnecessary time andcost incurred by firms in having to repeat or replicate the information required for prequalification purposes,we propose that Value Wales shouldhold one database for all such information.

9. To ensure high standards of technical proficiency and competency we suggestthat Value Wales encourages all publicbodies in Wales to select only firmswhich have demonstrated their technicalproficiency through independent vettingby trade association or similar schemes(this must apply up and down the supplychain).

Dealing withpoor practice

10.We urge the Welsh Government to give consideration tosetting up an office of Procurement Ombudsman similar to the Canadian model.

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The Guidance advises that the supply chain is made aware of themain contract payment dates and adds:

These requirements are incorporated in standard clauses publishedwith the Guidance:

from the end of 2013 the Supplier Qualification Information Database (SQuID) also required that tier 1 contractors commit topaying their supply chains within 19 days (unless a project bank account is intended to be put in place).

The results of the survey suggest that progress has been made bypublic bodies in monitoring tier 1 contractor payment performance.Despite the fact that the Welsh sample is much smaller than that forthe whole of England and Wales, it is significant that more than halfof the Welsh respondents monitor what is happening to paymentsdown the supply chain; whereas only a quarter of those in the largercombined survey reported that they did this.

Welsh public bodies have various methods ofchecking. for at least half of those who do monitor,it is a requirement of the prequalification processthat payments will be monitored. The other half requires compliance with the fair Payment Charter,or payment performance is followed up in monthlyproject meetings. It is assumed that the referenceto the fair Payment Charter is to the Charter published by the (then) Office of Government Commerce in 2007.

Extent of monitoring contractor payments to tier 2 contractors

Level of Contractor Payment Period Commencement of Payment Period

Tier 1 14 calendar days Due dates in the contract with the contracting authority

Tier 2 19 calendar days As above

Tier 3 23 calendar days As above

1 56%

2 44%

1. 56%(9) do monitor 2. 44%(7) do not

“Construction procurers in Welsh Government departments, local authorities and other relevant bodies in

Wales, need to ensure that their contracts with suppliers include the payment provisions outlined in [the

above table].”

“Public sector clients will be responsible for monitoring application of the standard contract clauses by

requesting regular reports as appropriate from the relevant main contractor.”

Fig. 1: Proportion of public bodies which

monitor payment

The fair Payment Guidance published by Value Wales in November 2012 stipulates the payment periods forpublic sector construction.

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The public bodies which do not monitor paymentperformance at all are listed below.Mid and West Wales fire and RescueNorth Wales PoliceVale of Glamorgan CouncilCeredigion CouncilMerthyr Tydfil CouncilNeath and Port Talbot CouncilWrexham Council

The bodies in this list responded as follows:

Ceredigion A Prompt Payment Certificate is requested at the time of tender and this is incorporated into the contract. The Council also uses the Welsh Government Supplier Qualification Information Database (SQuID) standardised pre-qualificationquestionnaire, and this has selection questions relating to the prompt payment ofsub-contractors.

Merthyr Tydfil Currently we do not include fair payment as a requirement in our construction procurement processes, however, we intend to do so in the future.

Neath and Port Talbot We have no plans to ensure fair payment is applied along construction supplychains.

Wrexham No other measures in place.

North Wales Police Ensure contractors are reminded of their obligations to pay their subcontractors ina timely manner during pre-contract and site meetings, but no formal contractualconditions are imposed.

Mid and West Wales Fire Ad hoc intervention when requiredand Rescue .

Vale of Glamorgan We are currently looking to include within our contracts the requirement for contractors to report all sub-contract payment terms to us. Also all contracts letunder the SEWSCAP framework have this requirement as a KPI. (Vale of Glamorgan Council may also introduce project bank accounts).

It is interesting that Ceredigion County Council refers to the requirements in SQuID.

Public bodies could make direct payments to sub-contractors in theevent of non-payment by a tier 1 contractor. Such option is available to be taken up by member states following revisions to theEU Public Procurement Directives. However, the option must firstbe transposed into regulation.

Report on a Survey

of Payment Practices and

Prequalification in Public Sector

Construction inWales

In the absence of regular monitoring, most publicbodies rely upon their Tier 1 contractors complyingwith the payment commitments in SQuID.

There is clearly further progress to be made.

1 67%

2 33%

1.67%(8) rely on SQuID - 2. 33%(4) do nothing

Fig. 2: Reliance on SQuID

Further research may be necessary to establish the actions taken by public bodies where there is non-compliance by Tier 1 contractors with the SQuID requirements. Perhaps there should be a standardised approach through guidance from Value Wales.

Fig. 3: Number of days taken to pay main/direct contractors

In Wales, as in the main survey, the majority of organisations pay within 30 days (see fig 3. above). However onlyfive of the public bodies which responded are paying their tier 1 contractors within 14 days or less in accordancewith the Value Wales fair Payment Guidance. The longer that public bodies take to pay the longer that tier 1 contractors will take to pay tier 2 contractors and so on down the supply chain. It seems that many public bodiesbelieve it to be sufficient if they pay within 30 days in compliance with the Late Payment of Commercial Debts Regulations 2013.

Value Wales may consider it necessary to remind procuring authorities of the payment periods in the FairPayment Guidance and the commencement of such periods.

Average time taken to discharge payment to main contractor

“Mid and West Wales Fire

and Rescue Service pay

71% of invoices within 10

days”

“South Wales Police pay

direct or main contractors in

accordance with statutory

requirements, which currently

stand at 14 days”

“In the last 12 months

Gwynedd has paid 82% of its

invoices within 14 days.”

The table below sets out the average times taken by each respondent to the survey to pay their tier 1 contractors:

DAYS PUBLIC BODY DAYS PUBLIC BODY

10 Pembrokeshire 30 Ceredigion14 Gwynedd 30 Neath & Port Talbot14 Merthyr Tydfil 30 Swansea14 South Wales Police 30 Wrexham15 Denbighshire 30 South Wales fire & Rescue21 North Wales Police 30 Mid & West Wales fire and Rescue21 Glamorgan 30 Monmouth30 Cardiff 30 Bridgend

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Fig. 4: Those who apply a cash retention

The extent of the practice of applying a cash retention in Wales isvery similar to that in England; the average amount retained is 5%.However the fact that the overwhelming majority of public bodies inWales still deduct cash retentions is disappointing given progresselsewhere in improving cashflow. Moreover deduction of retentionmonies signifies a lack of trust which undermines collaborativeworking.

Approximately £30 million of cash retentions will be outstanding atany one time on Welsh public sector construction. The bulk ofthese monies will have been provided by small firms in the supplychain. Moreover the monies are always at risk because of the possible insolvency of the tier 1 contractor but, on public sectorprojects, the tier 1 contractor is not faced with such risk.

A requirement that retentions are placed in trust or that tier 1 contractors provide a bank guarantee to ensure that themonies will be released to the supply chain should be a pre-qualifying requirement.

1 87%

2 13%

1. 87%(14) apply a cash retention 2. 13%(2) do not

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Fig.5: Uses made of cash retentions

The cash retention is generally retained in cash balances until it isdue for release to the lead contractor. Until then it is – presumably– used to fund other activities. Less than a fifth of public bodieskeep it in a ring-fenced account (i.e. in the client budget).One authority, Denbighshire County Council, states that it deductsnotional amounts from contractor payments rather than a retention;this appears to be a retention by another name. Of some concernis that two authorities (Monmouthshire County Council and SouthWales fire and Rescue Service) appear to use the cash for investment purposes. This is unlikely to be greeted with acclaim bysmall firms which fund most of the retention.

Use made of cash retentions while held by public bodies

“The construction sector in Wales is

largely dominated by small to

medium enterprises (SMEs), many

of whom play critical roles through

the supply chain in delivering our

public sector contracts. Access to

finance and cashflow are vital to

smaller sub-contractors and it is only

fair that they receive prompt

payment in accordance with

contract performance.”

Jane Hutt, Minister for finance

when announcing on 14 January

2014 the three projects that were to

pilot project bank accounts.

1 62%

2 19%

3 13%

4 6%

1.62%(10) leave it in general funds 2.19%(3) keep it in the client budget 3.13% (2) invest 4. 6%(1) deduct a notional amount from payment to contractor

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Use of project bank accounts

“North Wales Police do not

currently have Project Bank

Accounts in place, although

the Welsh Government are

piloting project bank accounts

from March 2014 for public

sector projects over £1 million

in value and over 4 months in

duration.”

“Vale of Glamorgan have

looked at project bank

accounts and staff have been

training. Three projects are

being run as pilots through

SEWSCAP framework and

guidance will then be drafted

on their use in Wales.”

“Preparations underway to

implement project bank

accounts in accordance with

the recommendations of

Welsh Construction Strategy

(Monmouthshire).”

The development and use of project bank accounts (PBAs)in Wales, with the support of the Welsh Government, canbe seen to be the way ahead for England and Wales ingeneral. To date PBAs are the most effective method ofensuring that there is both regular cashflow and that duepayments are protected against upstream insolvencies.for public bodies PBAs provide greater transparency overthe payment process and remove the need for detailed oversight of payment performance along the supply chain.

Whereas 40% of the bodies questioned are aware of andare actually pursuing PBAs as a goal, a mere 8% overall inthe whole of England and Wales are doing this. Many respondents from Wales indicated that they feel underpressure from the Welsh government to adopt PBAs.Those who are not yet using them are aware of them, butoften feel that their projects may be too small to warrantthe use of a PBA. Guidance on PBAs recently published by Value Wales indicates that often the durationof a project is more relevant to the decision whether or notto have a PBA rather than size of project; for a project ofvery short duration a PBA is unlikely to be necessary.

1 40%

2 60%

1. 40%(6) are using PBAs 2. 60% (9) are not

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Figure 6: Use of PBAs in Wales

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General commentary on the responses tothe payment questions

It is encouraging that there is currently much deliberation amongstWelsh public bodies on how best to improve cashflow along thesupply chain. We consider that much of this is due to the interventionist approach adopted by the Welsh Government andValue Wales. Even if they have not yet taken any action most ofthose questioned are currently reviewing their practices. The use ofSQuID, which addresses payment in the supply chain, helps ensurethat subcontractors’ cashflow is improved.

In some cases the contracts are audited regularly to ensure thatboth main contractors and subcontractors are paid regularly. Thefair payment clauses provided by the Welsh Government are in anumber of cases incorporated into contracts. It is not clearwhether or to what extent public bodies are prepared to takeaction against firms guilty of poor payment practices.

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It can be seen that procurement in Wales is in a better placethan that for England and Wales as a whole. The Welsh Government has been extremely pro-active in improving thepayment culture in Wales and in reducing waste and duplicationin the prequalification process through promoting the use ofSQuID. The Welsh Government’s announcement earlier in2014 that it intends piloting PBAs on three schools projects appears to have encouraged public sector clients in Wales totake up this option. SEC Group Wales has been actively involved in this process and remains committed to working withthe Welsh Government, Value Wales and Constructing Excellence in Wales in adopting forward-thinking practices thatsupport SMEs in Welsh construction.

Within construction there exists a general climate of fear whichprevents firms from complaining about bad practice. Currentlycomplaints can be directed to Value Wales but we are not awareof any firm which has heard of this facility. Even so firms wouldbe reluctant to use this because of their overriding need to preserve their anonymity. Inevitably, the investigation of complaints is likely to require that the complainant be identifiedat some point.

We believe that there is a case for the creation of a Procurement Ombudsman. In March 2012 the Institute forCompetition and Procurement Studies at Bangor University submitted a paper to the Welsh Government which referred tothe role of the Canadian Procurement Ombudsman. This role isa pro-active one. The Ombudsman promotes fairness, transparency and openness in public sector procurementthrough, amongst other things, publishing guidance, reviewingprocedures and monitoring procurement practices. The ScottishGovernment is currently giving consideration to this option. TheWelsh Government could decide to get there first.

But further work needs to be done if we are to significantly reduce the incidence of poor practice and, thus, achieve a morecost effective and collaborative delivery process. We encapsulate this in our recommendations at the beginning ofthis Report but, as a matter of priority, we suggest that consideration is given to how we can best protect supply chainretentions and how we can deal with those – whether publicbodies or firms supplying to the public sector – who perpetuatebad practice.

It is imperative that supply chain retentions are protected. Inmany other jurisdictions there exists legislation to protect retention monies. for example, in the majority of the States inthe United States, legislation exists to limit the time over whichretentions are held or to require that retentions are kept in trust.

Standardising the prequalification process

In England and Wales in general we noteda gradual trend towards adopting PAS 91 ora modified version of it within the next fewyears. Many authorities have used PAS 91as a basis for their own prequalificationquestionnaire.

None of the 15 Welsh respondents to thepre-qualification questions have any plansto use PAS 91 as they are almost all committed to the Welsh Government’sSQuID prequalification questionnaire. Twoof the 15 (Vale of Glamorgan, Mid and WestWales fire and Rescue Service) reportedthat they use Constructionline. ApplyingSQuID as the standard approach to supplierqualification in Wales was a key objective inthe Procurement Policy Statement launchedby the finance Minister in December 2012.

An oft-repeated complaint from small firmsin Wales is that they are often required toinput the same information many timesover. To avoid this, it is suggested that therelevant data is held by Value Wales to beaccessed by public bodies at pre-qualifyingstage for each procurement.

firms in membership of the SEC Groupmember associations in Wales will have undergone rigorous independent checks on their technical proficiencies and competencies. It is suggested that ValueWales encourages all public bodies to insiston the use of such firms up and down thesupply chain.

Conclusion

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THE REQUESTED INFORMATION:[Please note that the information requested relates to your construction procurement activities over thepast 12 months.]

1. What monitoring and reporting do you have in place to check whether your main contractors are payingtheir sub-contractors within 30 days?

2. If your response to Q1 is in the negative what other steps does your organisation take to ensure fair payment is applied along construction supply chains?

3. Please provide information showing the average time taken by your organisation to discharge paymentsto your direct or main contractors?

4. Do you apply a cash retention in your works contracts?

5. If you apply a cash retention what use do you make of the cash whilst it’s in your possession?

6. Have you or are you about to put in place project bank accounts on your construction projects?

7. Please provide information about any plans which your organisation has for improving payment performance along the supply chain [e.g. making payments to sub-contractors within 30 days (of the maincontract due payment dates) a pre-qualification requirement for lead contractors].

8. Has your organisation been using PAS 91 as the pre-qualification standard to be the exclusion of otherpre-qualification requirements?

9. If you are not currently using PAS 91 as the exclusive route to pre-qualification does your organisationhave plans to use PAS 91 (exclusively) in the future?

THANK YOU FOR HELPING WITH THIS FREEDOM OF INFORMATION ACT REQUEST.

PARTY MAKING THE REQUEST: Sarah Greatorex Executive SecretarySpecialist Engineering Contractors’ Group34 Palace Court London W2 4JGTel: 020 7 313 4819

EMAIL fOR RECEIPT Of RESPONSE: contact@secgroup.org.uk or sarah.greatorex@eca.co.uk

DATE Of REQUEST:

Appendix 1: FOI questionnaire

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Bridgend Council

Cardiff Council

Ceredigion Council

Denbighshire Council

Gwynedd Council

Merthyr Tydfil Council

Mid and West Wales fire and Rescue

Monmouthshire Council

Neath and Port Talbot Council

North Wales Police

Pembrokeshire County Council

South Wales fire and Rescue Service

South Wales Police

Swansea Council

Vale of Glamorgan Council

Wrexham County Borough Council

Appendix 2: List of respondent bodies

Andrew MarchantNational Executive Officer

Specialist Engineering Contractors' Group, Wales/CymruGarden House', Tyle House Close, Llanmaes, Vale of Glamorgan, Cf61 2XZ

Tel: 01446 790159 Mobile: 07795 394499Email: andrew.marchant@b-es.org

www.secgroup.org.uk

12% (2) Fire & Rescue

1 2 3 1. 76% (12)Local authorities

2. 12% (2) Police

3. 12% (2) Fire & Rescue