Despite progress at many major contractors, the construction industry is still moving too slowly in tackling late payment, says the Good Business Pays campaign group.
The Good Business Pays campaign launched on the 14th May 2021 to encourage the UK’s largest companies to fast track payments to small suppliers, helping them bounce back from the Covid-19 pandemic and injecting vital capital into the economy.
“Our mission is to encourage big businesses to not only fast track payments, but to go one step further and re-evaluate their payment terms to ensure suppliers are being paid when they need it,” says campaign chair Terry Corby.
Small businesses are a growth engine for the UK economy, employing 61% of the private sector workforce (16.8 million) and generating 52% of turnover. Yet almost 50,000 go out of business each year due to cash flow problems.
Developed initially with the Federation of Small Businesses, the Good Business Pays campaign is supported by other leading business groups including the CBI, Make UK, the Institute of Directorts and the British Chambers of Commerce.
Getting big customers to pay small suppliers promptly is an ongoing problem, but the construction industry’s payment practices have created an even greater challenge within the sector, the campaigners say.
Slow payment not only results in small businesses in the construction sector having less cash reserves to invest back into themselves, but also means critical team time that should be spent on growth and development is instead wasted on chasing unpaid invoices. It puts leaders under stress and pressure, undermining the value of their entrepreneurial skills to our economy.
According to research from the Centre for Economics & Business Research (CEBR) published earlier this year by Good Business Pays, a one day reduction in the amount of time taken by large companies to pay smaller companies across all sectors would boost their annual turnover by £1.7 billion and help create up to 61,000 extra jobs.
The CEBR research identified construction as one of the top three sectors in which companies had most to gain if big customers paid their bills faster. It calculated a potential annual revenue boost of more than £95,000 for small businesses and £500,000 for medium-sized businesses within the sector. This simple action would not only deliver a much needed economic boost for these businesses, but in turn would strengthen the sector as it builds back stronger.
So why are big construction companies so notoriously bad at paying their suppliers on time?
Time lags between delivery of goods or services and payment frequently arise through the use of trade credit, allowing customers to pay suppliers later than agreed in the terms of payment. In fact, an estimated 2.3 million small businesses currently offer trade credit to their customers, of which 1.1 million report having problems with customers paying late. However, this tends to be even more common in sectors such as construction and manufacturing.
The Construction Act, which aims to ensure that payments are made promptly throughout the supply chain and disputes are resolved swiftly, has created nothing but a complex system of dates and notices, which must pass between the payer and payee., the campaigners say. This means it can take up to six months from expenditure to revenue. Frustratingly, instead of removing these payment barriers, the industry has accepted the situation and allowed it to evolve to an unbearable point.
Rob Driscoll, director of legal & business at the Electrical Contractors Association (ECA), chairs the Cabinet Office SME Payment Group and is the business models digital liaison with the Construction Leadership Council. He says: “Payment culture in construction is outdated and must change. The sector currently acts like a pyramid, with the larger corporates and tier-one contractors spreading the workload down the supply chain. That means the base is huge and delivery points at which people in muddy boots doing the work can be very detached from the client. As you go down the pyramid, organisations get smaller and less sophisticated, elongating payment times in the industry.”
The Good Business Pays research highlighted how Covid-19 has led to a measurable worsening of payment practices. In the two years prior, large businesses had been gradually improving their average payment times. During the pandemic, this trend reversed with the average time increasing from 36.4 days to 37.4 days.
Rob Driscoll continues: “Covid-19 initially shook the sector, with many sites forced to close in the first lockdown. But this isn’t the industry’s only crisis in recent years – we cannot forget Brexit or the supply chain challenges of the global materials shortage. The industry is facing severe material shortages and a lack of workers, yet our books have never been busier. A major concern for me is that people are signing contracts for projects they need to deliver in 12 months’ time, but they don’t know the price they’re going to be charged for the materials they will need.”
However, unlike the financial pressures caused by Brexit, late payment is something that can be controlled and improved quickly.
Terry Corby, chair of Good Business Pays, says: “Construction has been one of the most resilient sectors over the past 18 months. Despite a shut down in March 2020 during the first lockdown, the sector adapted almost overnight to new, flexible ways of working to deliver projects for customers. As recovery continues at pace, it’s never been more important for big companies to re-evaluate their payment terms to the small suppliers who helped keep them working when much of the nation was at a standstill.”
Rob Driscoll says: “If the construction industry wants to rid itself of the unfavourable reputation of being the slowest industry, big businesses must do more to support small suppliers, and the smaller companies must speak up and hold customers accountable to their payment terms.
“To get to the true picture of prompt payment, we need to measure not just the volume of transactions paid within timeframes, but also the value of transactions.”
Some of construction businesses are getting it together and improving their payment practices.
Terry Corby says: “I’m encouraged by the positive signals coming from construction businesses such as Barratt Development, who are paying their suppliers on average within 24 days. Mace and Kier too are paying within 30 days. Small suppliers can – and should – be using their power to influence payment terms, holding big businesses to account for their poor practice. If a business fails to pay within 30 days, they have the right to vote with their feet and refuse to work with them. That’s why we’ve created a tool at goodbusinesspays.com that enables suppliers to check the payment records of big customers. I’d encourage the leaders of small businesses in the construction sector to take advantage of the insight when they consider taking new contracts on-board.”
He continues: “Claiming to pay ‘in line with contractual terms’ simply isn’t enough – especially when the original terms are bad for the small supplier. To end the problem of late payments and accelerate progress, we have to make faster payments in 30 days or less, a construction industry standard that both investors and customers expect from bigger businesses who claim to be responsible. That’s why we’re calling on Britain’s top contractors to commit to the Good Business Pays principles and fast track payment to help small construction businesses thrive.”