A respected debt recovery expert in the building industry has lashed out at a proposed new protocol aimed at encouraging large companies in Australia to improve their payment practices toward small businesses.
Anthony Igra, managing director of Sydney-based Contractors Debt Recovery, says a new Prompt Payment Protocol proposed last month by Minister for Small Business Gary Gray correctly identifies problems associated with late payments but offers little in the way of effective solutions.
He says the protocol would be of almost no help at all to contractors and sub-contractors in the construction industry and that dispute resolution processes with enforceable outcomes are a much more effective means of solving payment problems.
“In my experience there are only two things that make a party pay faster, or at all: A carrot or a stick” Igra said. “These are the first things I looked for in this proposal, and I did not find any carrots and only found one stick.”
Outlined in a discussion paper released on July 24, the proposed protocol sets out a number of core principles of good payers, whom it says should consistently make payments on time; communicate clearly about contract terms, payment procedures and possible late payments; and have clear complaint resolution processes in place.
Businesses that sign up to and follow these principles will be able to use new Prompt Payment Protocol branding, informing suppliers and the general public about its good payment record and practices.
Citing evidence from the UK, in which signatories to a similar protocol now pay on average 12 days faster than they did when the protocol was introduced in 2008, the report argues the protocol would provide an incentive for large companies to improve payment practices.
Igra disagrees, saying the report offers no evidence that it was the protocol, as opposed to more rigorous credit procedures following the GFC, which produced the UK result – a result which if replicated in Australia would still mean small business here would have to wait until 2018 to see a reduction in payment times from 54 days to 42 days.
Furthermore, Igra says mere recognition as a ‘good payer’ is not sufficient in terms of an incentive for large companies to forego huge sums of interest associated with amounts withheld past due payment dates. He says what is needed instead are enforceable means, such as the Security of Payment Act which operates in the construction industry.
“All I can say is ‘So What?’” Igra says, referring to an assertion in the report that companies who did not sign up to the protocol would face greater public scrutiny with regard to payment practices. “If this is the worst that can happen, then this will be a price most companies will be more than willing to pay to hang on to supplier’s money for longer.”
“This is no stick at all, and the proposal’s success seems entirely reliant on some kind of communal goodwill. This is not a driver that will change behaviour.”
Late payment practices have been a major problem for contractors and sub-contractors in the construction industry throughout Australia in recent years.
A Commonwealth Bank report released in May found the average building industry operator is owed $18,897, more than half of which is overdue.
According to Dunn & Bradstreet research outlined in the government's discussion paper, average trade payment times in the construction industry currently stand at 52.6 days.