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News & opinion

6 JUL 2018

Network Rail abolishes retentions as part of a suite of contract changes

Network Rail is taking an industry-leading step to change the way major suppliers working on the railways pay their subcontractors.

Leading the way

Network Rail is making significant changes to contracts ahead of the upcoming five-year funding period, 2019-24. The most substantial changes to contract terms will commit suppliers to pay their subcontractors within 28 days and remove the use of retentions on those payments, something that has long been an area of debate across the industry due to the detrimental effect it can have on smaller suppliers.

These contract changes are part of a number of improvements being made to help create a healthier environment for suppliers at all levels and will result in the rail industry becoming the first sector within the wider UK construction industry to employ these payment measures, overhauling the way large contractors do business within their supply chain.

Network Rail implemented a best practice Fair Payment Charter in 2011 which applied these principles to their own payments and enrolled their Tier 1 suppliers to follow suit and deploy supporting processes and procedures, all-be-it on a voluntary basis. Building on a mature and effective collaboration with their suppliers and industry stakeholders, Network Rail have described the decision to formalise this regime as "the next natural step" and something their major suppliers support.

Stephen Blakey, Commercial Projects Director, Network Rail said: "The Fair Payment Charter was about recognising that cash flow is the ‘life blood’ for every supplier by committing to pay for goods and services in a fair, predictable and timely way. Harnessing the support we have already received from our major suppliers, we have simply taken the next natural step and formalised that approach. Culturally, it sends a huge signal as to the value we place on a sustainable supply chain and the way we want to do business.

"We recognise the challenges faced by smaller suppliers and are in a position to influence the way work on our railway is delivered and paid for. It is in our interest to have a sustainable supply chain at all levels – they are vital to the successful delivery of our projects and the safe operation of Britain’s railway."

Benefits of the contract changes centre on:

  • better protection of lower levels of the supply chain through removing retentions, which withhold large sums of money from sub-contractors until project completion. This will place smaller suppliers in a stronger financial position.
  • a mandated payment regime of 28 days, which means that Tier 2 companies, which are predominantly SMEs will be owed a smaller amount of money at any one time, again strengthening their cash flow.
  • the introduction of project bank accounts on some of Network Rail’s major projects will mean payments to subcontractors can be agreed by the client and scrutinised more closely. This will provide greater certainty and reassure to SMEs delivering work on their projects, as it means payments made to the project by Network Rail are transparent and the distribution of onward payments to subcontractors are also visible.
The changes will make a significant difference to smaller suppliers in particular, who rely on regular cash flow to operate successfully. We want to foster an environment that is fair, sustainable and encourages growth; but not at the expense of our larger suppliers. The changes are something our major suppliers are very supportive of and we continue to work closely with them to help manage this effectively and avoid negative cash flow to our Tier 1 suppliers.

Support for the change

Network Rail’s decision to make these changes has clear support and advocacy across the sector with key suppliers confirming that it as a natural next step in a joint initiative to drive industry change.

"Real change in industry requires real leadership. Since its Fair Payment Charter, Network Rail has provided this leadership. It has worked with its suppliers in a manged process to roll out prompt payment and is proving that, where there is a will, clients and industry can work together to axe unwanted and costly retentions," said Alastair Reisner, managing director, CECA.
"VolkerFitzpatrick, in support of the leadership shown by Network Rail, consider the financial health of our supply chain to be of critical importance to meet our delivery commitments and as such we are fully supportive of formalising our commitment to fixed payment terms of no more than 28 days and the avoidance of holding retentions on our supply chain," said John Cox, managing director (Rail), VolkerFitzpatrick.
"Network Rail’s introduction of sub contract payment terms and abolition of retentions is wholeheartedly endorsed by Amco. Through this, Network Rail are recognising the value and contribution of the whole supply chain, and extending the collaborative principles already established through the Fair Payment Charter. This is an industry leading example of how to embrace the supply chain and demonstrates how we can all work together to bring efficiency, value, and a great service to our collective stakeholders and customers," said Andries Liebenberg, managing director, AMCO.

Other changes include the deployment of a Railway Schedule of Dayworks, refreshed Preliminaries, the introduction of time bar clauses and the roll out of National Performance Metrics.

Culturally, it sends a huge signal as to the value we place on a sustainable supply chain and the way we want to do business.

Stephen Blakey
Network Rail

Stephen Blakey, Commercial Projects Director, Network Rail said: "The Fair Payment Charter was about recognising that cash flow is the ‘life blood’ for every supplier by committing to pay for goods and services in a fair, predictable and timely way. Harnessing the support we have already received from our major suppliers, we have simply taken the next natural step and formalised that approach. Culturally, it sends a huge signal as to the value we place on a sustainable supply chain and the way we want to do business.

"We recognise the challenges faced by smaller suppliers and are in a position to influence the way work on our railway is delivered and paid for. It is in our interest to have a sustainable supply chain at all levels – they are vital to the successful delivery of our projects and the safe operation of Britain’s railway."

Benefits of the contract changes

  • Better protection of lower levels of the supply chain through removing retentions, which withhold large sums of money from sub-contractors until project completion. This will place smaller suppliers in a stronger financial position.
  • A mandated payment regime of 28 days, which means that Tier 2 companies, which are predominantly SMEs will be owed a smaller amount of money at any one time, again strengthening their cash flow.
  • The introduction of project bank accounts on some of Network Rail’s major projects will mean payments to subcontractors can be agreed by the client and scrutinised more closely. This will provide greater certainty and reassure to SMEs delivering work on their projects, as it means payments made to the project by Network Rail are transparent and the distribution of onward payments to subcontractors are also visible.
The changes will make a significant difference to smaller suppliers in particular, who rely on regular cash flow to operate successfully. We want to foster an environment that is fair, sustainable and encourages growth; but not at the expense of our larger suppliers. The changes are something our major suppliers are very supportive of and we continue to work closely with them to help manage this effectively and avoid negative cash flow to our Tier 1 suppliers.

Support for the changes

Network Rail’s decision to make these changes has clear support and advocacy across the sector with key suppliers confirming that it as a natural next step in a joint initiative to drive industry change.

"Real change in industry requires real leadership. Since its Fair Payment Charter, Network Rail has provided this leadership. It has worked with its suppliers in a manged process to roll out prompt payment and is proving that, where there is a will, clients and industry can work together to axe unwanted and costly retentions," said Alastair Reisner, managing director, CECA.
"VolkerFitzpatrick, in support of the leadership shown by Network Rail, consider the financial health of our supply chain to be of critical importance to meet our delivery commitments and as such we are fully supportive of formalising our commitment to fixed payment terms of no more than 28 days and the avoidance of holding retentions on our supply chain," said John Cox, managing director (Rail), VolkerFitzpatrick.
"Network Rail’s introduction of sub contract payment terms and abolition of retentions is wholeheartedly endorsed by Amco. Through this, Network Rail are recognising the value and contribution of the whole supply chain, and extending the collaborative principles already established through the Fair Payment Charter. This is an industry leading example of how to embrace the supply chain and demonstrates how we can all work together to bring efficiency, value, and a great service to our collective stakeholders and customers," said Andries Liebenberg, managing director, AMCO.

Other changes include the deployment of a Railway Schedule of Dayworks, refreshed preliminaries, the introduction of time bar clauses and the roll out of National Performance Metrics.