The domino effect of one late payment

Late payment is, and always has been, the scourge of the construction industry; and, if you own a SME business, it is likely to be something you have experienced more than once.

In fact, research from Bacs Payment Services Ltd in 2015 found that more than 75% of UK businesses have had to wait for at least a month beyond their agreed contract terms before getting paid.

The excuses are often used and well-worn: holding retention to encourage the contractor to rectify defects, whether large, small or fictional; preserving cash flow or protecting diminishing levels of capital; clunky, labour-intensive systems…the list goes on.

The heartening news is that, on the whole, the UK’s biggest housebuilders are getting better at paying on time – although payments are still being made later than the industry standard of 30 days, despite many companies being members of the Government’s Prompt Payment Code.

Payment practice reports, which large businesses are required to submit every six months, reveal that on average an invoice is paid within 34 days; a reduction of three days when compared to the previous submission.

Persimmon Homes and Galliford Try are amongst the biggest improvers, with their last five reports showing reductions in the amount of time taken to pay an invoice. Countryside are the worst performing of the nation’s main housebuilders, taking an average of 55 days to make a payment.

For many of the biggest developers, who are regularly posting large profits, the occasional late payment is not a big deal; but, for the contractor who is waiting on income from works carried out, the effect can be wide-reaching.

Picture this: you are a small contractor. An invoice for completed works is submitted correctly, and on time, but – for some reason – is withheld or not paid. That money fails to appear in your account when you expected it to.

This means that your working capital is less than it should be, in a time when you may be struggling to make ends meet as it is. Your perception of the business who has failed to pay you has taken a hit, and their reputation is damaged; but that’s the least of your worries.

You might now struggle to pay your staff, or your subcontractors; skilled workers who are in high demand, people who may decide never to work for you again or – in extreme cases – may decide to leave the industry forever and worsen the already critical skills shortage. Your reputation is tarnished, as far as they’re concerned.

To keep things moving on site, you bite your tongue and continue to provide labour when requested, and spend valuable time and resources in the background chasing payment and receiving woolly or vague commitments in return. Eventually, exasperated, you withhold labour. You don’t want to, but desperate times call for desperate measures.

This opens the floodgates, and you field angry phone calls, emails threatening legal action, and all the while you are losing money. The developer is also losing money, and, in the face of a slipping programme, begins to get more frantic and, in some cases, more threatening. You lie awake at night, wondering how you will survive adjudication, or a legal battle, and how you will make ends meet.

Eventually, after days – sometimes weeks – of arguing, your invoice is paid; but it has taken its toll. Your reputation is damaged, the project which you once tendered in earnest now leaves a bitter taste in your mouth, and – perhaps most importantly – your mental health has suffered in an industry which experiences the highest rates of those turning to alcohol or drugs, or more.

The moral here is simple; for big businesses, with employees who earn a set wage and often have the luxury of not worrying when they will receive money into their account, paying invoices promptly will have lasting positive effects and strengthen relationships at a time when the industry is facing threats on multiple fronts.

Yes, retention sometimes has its place, within reason; but, in the majority of instances, spending five minutes processing an invoice fairly and in good time will save days of anguish for those further down the supply chain. By anyone’s book, that’s five minutes well spent.

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