17th October 2019
Late payment: a construction industry epidemic?

On 1 September this year, new Cabinet Office rules came into force that sought to prevent late-paying contractors from winning profitable public sector construction contracts. Late payment has long been rife in construction (30% of all late payments occurring within this sector), with small and medium-sized businesses often bearing the brunt of unfair payment conditions. A report published by Construction News in March this year revealed that contractors are taking an average of 43 days to pay invoices (30 being the standard across most industries), while an average 28% of invoices are not paid according to the original terms set. So, how will the new rules (otherwise known as the ‘prompt payment initiative’) seek to tackle this endemic practice?

While originally, the rules sought to block out any contractor who could not prove they were paying 95% of their invoices within 60 days in at least one of the two previous reporting periods, they were watered down at the last minute amid fears that no major contractors could meet these requirements. A new 75% threshold was introduced, with the aim of gradually increasing this to the originally planned figure.

Why is construction particularly badly hit?

Subcontracting is a common practice in construction, occurring when a larger contractor appoints smaller firms to perform sections of the contracted work. This means that construction projects often involve long supply chains with money passing through multiple hands, leading to potential issues when payment is held up at any point in the chain. To make things worse, main contractors will often withhold payment as a way of financing works when they don’t have sufficient capital, or to deflect payment risks away from themselves and onto other suppliers in the chain.

Basically, if a contractor doesn’t have cash readily available or is waiting to receive payment from another contractor, it may be unable to pay its supplier within the allotted payment period. This can be extremely destablilising for suppliers and all too often causes smaller firms to go out of business. According to research published last year by the Federation of Small Businesses (FSB), if all payments were made on time it would prevent the collapse of over 50,000 SMEs every year.

A litany of laws and regulations

A considerable number of laws and acts have been passed over the years in an attempt to prevent late payment, but they appear to be having limited success. The Late Payment of Commercial Debts Regulations 2013, building on the previous Late Payment of Commercial Debts (Interest) Act, imposes limits on payment periods that should in theory prevent late payment from occurring. The Housing Grants, Construction and Regeneration Act 1996 also includes provisions to enforce prompt payment along the supply chain.

More recently, the Prompt Payment Code, established by the government in 2008, was created in an attempt to bring about a change in payment practices across the commercial sector. The Code sets out principles for fair and timely payment, which its 1,700 signatories have committed to following. In April 2019, six firms were actually suspended from the Code, with one company, John Sisk & Son, being struck off altogether. However, the sanctions for failing to adhere to the principles are limited to the reputational damage a firm might suffer if its poor payment practices are exposed by the media. And one has to wonder how effective the Code really is when construction giant Carillion, a signatory to the Code which famously folded in January 2018, ended up owing £2 billion to subcontractors and suppliers upon its collapse, none of which was paid when it went into liquidation.

Enforcing prompt payment

It would appear that current laws and sanctions aren’t punitive enough to quash the late payment epidemic, but the recently introduced prompt payment initiative does appear to have raised the bar by blocking poor performers from tendering for lucrative government contracts. With awareness of the issue at an all-time high since Carillion’s collapse, however, it’s likely that more measures will be introduced in future. We can only hope that putting in place stricter regulations will eventually lead to the change in payment culture the industry is crying out for.