Companies suffering from late payment in the construction industry need to seize the initiative for themselves.

The intentions were honourable but the results have been disappointing. The UK is particularly vulnerable to the endemic problem of late payment in the construction industry, given commonplace low margins and constrained cash flows.

So when the government-backed Construction Leadership Council (CLC) agreed the Construction Supply Chain Payment Charter in 2014, there were hopes for a breakthrough.

So far, however, progress has been limited. Just two members of the CLC have signed up to the charter, and in the summer of 2015 the Government appeared to signal a move towards a more arms-length relationship with the construction sector, by restructuring of the CLC. That suggests there will be less pressure on businesses to join the scheme.

AN OPPORTUNITY MISSED?

That is unfortunate since the charter set out a number of ambitious targets that would provide valuable comfort to companies up and down the supply chain that continue to suffer with late payment in the construction industry. Most importantly, it commits signatories to reducing their payment terms to 30 days by January 2018, with an intermediate target of 45 days by July 2015. Signatories also pledge not to withhold cash retentions and to make payments electronically.

It is not as if the need for action has somehow disappeared. Research published in 2015 by the Federation of Master Builders found that while 90% of small construction firms were agreeing contractual payment terms with their clients of 45 days or fewer, in line with the CLC charter’s intermediate target, just 57% of them were receiving payments on time.

There is little reason to think there has been any substantive improvement since then. Indeed, figures from the Department for Business, Innovation and Skills, published in October 2015, showed that UK businesses as a whole were owed £26.8bn in late payments, an increase on the Government’s previous estimates. The Asset Based Finance Association said the value of unpaid invoices in small and medium-sized enterprises in the UK had risen by a third since 2011.

LEGAL OBSTACLES

Lawyers specialising in the construction sector warn that legal issues frequently hold up payments in the sector, amid disputes over when exactly companies and their contractors are entitled to claim payment. These sort of hurdles, which are especially prevalent in public sector projects, can exacerbate late payment in the construction industry, solicitors warn.
To add insult to injury, late payment issues can occur both during a construction project with supposedly agreed regular payments turning up late, for example ? and at the end, when the final payment is due.

TAKING ACTION AGAINST LATE PAYMENT IN THE CONSTRUCTION INDUSTRY

However, it is increasingly clear that no third party, whether government, regulatory body, or anyone else, is going to intervene on construction companies’ behalf. Instead, the industry is going to have to take the initiative itself.

For businesses affected by late payments, that means taking a number of steps. These start with setting out and agreeing the payment terms of each contract right from the beginning, so there is no scope for dispute later on. It also means taking action as soon as a payment becomes overdue ? credit control staff should get involved straight away, or businesses may choose to involve a third party.

Acting speedily is important. Late payers who are actively chased are more likely to pay up more quickly ? and there is always the danger that an unpaid bill will never be settled if the debtor goes under in the meantime.

To put such processes into effect, construction companies need very good visibility of their accounts, so that late payments come to light immediately. For example, automated account systems will generate warnings straight away and can even be used to produce and despatch late payment notices to debtors.

Construction companies will also want to look at their own late payment practices. Are payments owed being made on time? If not, is this down to technology failure or cultural practices? Bear in mind too that the company may be held to account for any late payments owed by suppliers it has employed, if they have have subsequently used sub-contractors.

The bottom line is that the construction industry’s late payments problem is both intractable and enduring. Only when the sector itself makes this issue a priority will the difficulties begin to ease.

TAKEAWAYS:

  • Late payments continue to dog the construction sector, and companies need active strategies to counter the problem.
  • Construction companies are particularly vulnerable to late payments given their low margins, constrained cash flows and the practices in the industry.
  • Companies should put in place clear procedures for minimising late payment in the construction industry and dealing with problems when they do arise.

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