News Item

Posted: 13th April
By: rlf

Late payment restricts construction growth

Whilst late payment is an ongoing problem for businesses in almost every industry, it has hit the construction industry particularly hard.

According to the findings of a recent survey carried out by BACS Payment Services Limited, late payment is now the single biggest threat to the survival of many construction firms in the UK, with over three quarters of businesses being forced to wait at least a month beyond their agreed contract terms before getting paid.

Why is late payment a problem?

For a small construction business, payment terms exceeding 30 days can mean the difference between survival and failure. Late payment can lead to serious cash-flow problems and unnecessary costs, such as extending bank loans to cover temporary shortfalls.

Small businesses are then forced to pay their own suppliers (and in some cases, staff) late, which has a domino effect on the rest of the industry, with end clients, builders’ merchants, construction firms and suppliers all being affected.

What’s the solution?

There have been several attempts to improve the situation in the past few years. In 2008, the government implemented the ‘Prompt Payment Code’, to help SME’s recoup the £30.2 billion owed to them in outstanding payments by larger companies. However, a recent survey by the Institute of Directors found that two-thirds of SME’s were still experiencing late payment in 2014.

The Government tried another approach last year, with the introduction of the ‘Construction Industry Payment Charter’. The charter saw major contractors, clients and the government commit to paying their suppliers within 30 days, from 2018. The deal, organised with the Construction Leadership Council, currently commits contractors and clients to pay their suppliers within 60 days. From June 2015 this will be reduced to 45 days and from January 2018, to 30 days.

Late Payment Charter

While the late payment charter is certainly a step in the right direction for the construction sector, some within the industry are questioning its impact due to the low number of signatories. When it was launched, only nine companies signed up and questions have subsequently been asked about how it will be policed and enforced.

A third option…

Last month, the Government set out proposals that will allow subcontractor trade bodies to challenge unfair main contractor payment terms in court.

The proposed new powers would give trade bodies more power to challenge late payments and unfairly long payment terms on behalf of their members. It is hoped that these measures could be enforced before contracts are signed, giving smaller businesses more confidence and legal backing to insist on more reasonable payment terms.