Neil Washington 02 May 2019

Coming to terms with late payments

The obligation on firms to disclose their payment terms came into effect in 2017, when it was reported that SMEs were owed £26.3bn in overdue payments. But has much really changed?

Judging by the headlines so far in 2019, many industries are still struggling to meet best practice. The construction industry is not alone, yet the subject of late payments in the sector has very specific ramifications for its long-term health. And, with a greater spotlight on the sector as a result of major failings like Carillion over the last year, the pressure is on the industry to reduce the time it takes them to pay its supply chain. The question is, is change happening quickly enough?

You can see how the industry got itself into this state, though. Many of the largest listed contractors operate on extremely tight margins and must satisfy investors in the City. Paying subcontractors promptly can often fall down the list of priorities, either deliberately or not.

The issue for the public sector is that this has long-term repercussions. The sector makes up a huge proportion of the construction sector’s client base. Being stricter on good payment practices and auditing this with the main contractors could help accelerate positive change for SMEs further down the supply chain.

The issues it causes

Firstly, let’s look at the problems failure to pay can cause. Main contractors and their supply chains have a symbiotic relationship. Paying on time and ensuring that subcontractors can maintain good cashflow means that they will be more likely to accept more work and do a good quality job. Regardless of the end client, if a subcontractor is disgruntled with a main contractor, they are unlikely to do their best work and, in the case of long projects or frameworks, may down tools all together. This can create significant delays while the client is forced to wait until the main contractor sources alternative labour or specialist skills.

Since the problem with payments is so common, it’s rare that a subcontractor will only be working for just one bad payer at any given time. This can so drastically affect their cashflow that they risk going bust. Smaller businesses like these are vitally important to local economies and while many councils will stipulate that main contractors have to source a local supply chain to win work, this good intention could quickly be undone if the main contractor is paying that supply chain late.

The number of small players in the industry has a direct relationship with how challenging or costly it is to complete work. The industry is facing a huge skills shortage and access to labour, particularly specialist skills, is increasingly difficult. Often these skills come from smaller businesses. A weakened supply chain drives up costs and results in longer project timeframes.

What can the public sector do?

The construction industry is a varied beast and each contractor has different internal pressures. In some cases, larger contractors will use cash which is due to be paid to their supply chain as working capital and without pressure from clients to change this, it could carry on for a long time. While late payments must now be recorded and published, public shaming doesn’t appear to be having the dramatic impact first expected.

It will take client action too. The public sector should put more weight on contractors’ records on payment. Otherwise, there will be little punishment for the worst offenders.

While most stipulate good payment terms when appointing a major contractor, very few follow this up during projects. We’d advocate a review of payment practice statistics as part of the bidding process and spot checks on payments during contract periods to ensure contractors are making good on their promises.

I don’t doubt that most of the construction industry’s biggest businesses recognise the benefits of paying their supply chains on time, and the risks of not doing so. However, many don’t have enough of an impetus to change what’s a very engrained part of the way the industry operates. Going against the curve can be difficult, particularly when your competitors aren’t doing much themselves. Direction from clients could initiate a huge change for the benefit of local businesses in their area and their long-term construction costs.

Neil Washington is finance director at contractor Novus Property Solutions

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