A recent article in Building magazine about John Lewis considering writing clauses into its construction contracts allowing it to pay subcontractors if main contractors don’t pay quickly enough is intriguing.
So intriguing, in fact, it has the capacity to be a game changer. It suggests the public mood is getting behind the idea that major firms such as the big supermarkets cannot use their supply chains as the excuse for things that are not right.
This has been brought home by the horse meat scandal, and it has been interesting to see the response change as the story unfolded. It went from “we trusted our supply chain and they lied to us”, effectively to “we will take full responsibility for the supply chain”. It became clear how much risk these big companies put themselves under when the full murkiness of the supply chain was revealed, with horse meat magically becoming beef as it was passed around Europe.
There is nothing wrong with horse meat; in fact, it’s quite nice. I have had it often in the Netherlands, but then I knew I was having horse meat. The nub of this scandal was people not knowing they were having horse meat due to the disconnect between the supermarkets and their supply chains.
It is this same disconnect between the customer and the supply chain that causes problems in the construction industry. This is evidenced by the efforts that have been made over the past 20 years to resolve the flow of cash from client to the subcontractor at the bottom of the chain.
How much of a game changer the John Lewis initiative becomes will depend on how many other clients see that approach as valuable to their business. However, I think that publicly anonymous developers would be unlikely to adopt this.
John Lewis is unlike other high-street firms in that it is an employee-owned partnership and is not concerned solely with share price. But it only takes one firm to change the game for the rest.
In the Building article, an analyst comments that clients will be "trading certainty and risk for cost”, noting that clients would probably have to pay a premium for main contractors to maintain the margins they would lose from holding payments for less time. That is a predictable response.
In other industries there is a fairly simple axiom — disrupt your business model before someone does it for you. The John Lewis initiative might just be that disruption.
