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Government must do more to tackle late payment in construction

The Government needs to wake up and legislate statutory requirements to make late payment a relic of the past, according to industry experts.

The business, energy and industrial strategy select committee has published ‘Small businesses and productivity’, a report which identifies the huge damage that late payment is inflicting on small business.

Rachel Reeves, chair of the committee, said “Many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability.”

Reeves went on to call for a statutory requirement for medium and large companies to pay outstanding invoices within 30 days, especially those involved in public procurement.

The National Federation of Builders (NFB), the voice of construction SMEs and regional contractors, welcomes the select committee’s long overdue recommendations, as well as the appeal to tackle late payment.

Jeremy Corbyn, leader of the Labour Party, highlighted in April 2017 how late payment hurt the UK construction industry and used his party’s general election manifesto to declare war on this practice.

The Conservatives also pledged to ensure large contractors complied with the voluntary Prompt Payment Code, which requires invoices to be paid within 60 days.

However, very little has changed. Carillion was able to win work from local government right up until its collapse, despite imposing 120-day payment terms which could be sidestepped upon paying a fee.

Richard Beresford, chief executive of the NFB, said “Late payment prevents businesses from investing, stops workers from getting paid and, ultimately, forces companies to shut down.

“It’s a shameful way to treat business partners in the supply chain but, almost one year from the collapse of Carillion, we have learnt absolutely nothing.”

Neil Walters, national chair of the NFB, concluded “Late payers continue to win public work and small businesses are left begging for their hard-earned money. Voluntary reform is simply not working and the Government needs to wake up and legislate statutory requirements to make late payment a relic of the past.”

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Government to assist the 74% of construction companies being killed by late payment

A new announcement by Government to address the issue of late payment is expected to help the 74% of construction companies that have almost gone into liquidation due to the unfair practice.

The package of measures unveiled by the Small Business Minister Kelly Tolhurst will also reduce the hidden, human cost of delayed payment. According to research commissioned by the Prompt Payment Directory, 48% of the 400 construction companies polled reported depression, panic attacks, suicidal thoughts and anxiety as a result of late payments.

Late payment also affects a company’s ability to reliably predict cash flow, invest in training or even pay staff and bills.

The Government is pulling together strands that have existed for a while, but is now backing them with enforcement.

The small business commissioner will join the board of the Prompt Payment Code and measures will be put in place to remove signatories from the code’s list. This will help avoid the farce of Carillion and other similar companies being on the list despite their payment terms of 120 days being well beyond what could be considered reasonable.

The Government will aim to pay 90% of undisputed invoices within five days. Central and local government are not always prompt payers, often paying outside the terms of legislation. Having the Government lead by example will help change the culture.

There are also proposals that include consideration of how company boards can implement responsible payment practices and the promotion of accounting tools to help businesses manage payment processes.

While the Government has also highlighted its Mystery Shopper service that allows companies to report poor practice, it does not acknowledge the imbalance in the relationship between companies and their suppliers. Often the supplier carries much of the risk of the project in addition to being paid late. Suppliers in this position often do not report late payment because they do not want to jeopardise future work.

Neil Walters, national chair of the National Federation of Builders, said “Payments move from one business to another, but we should never forget the human cost of paying late. Enforcement is the key to making these government proposals work so that construction will no longer be the sector with the highest rate of insolvencies and all small businesses can stay open for business.”

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