Construction Sector Payment Practice in the Spotlight
Build UK, the leading representative organisation for the construction industry here in the UK, recently published information on the payment performance of its top 24 contractor member companies using data submitted under the Duty to Report on Payment Practices and Performance. The National Federation of Builders (NFB) weighed in by criticising Build UK due to their failure to follow best practice and the “utter disregard” for SMEs that these top contractors display.
Worryingly, the data reveals that top contractor members of Build UK take more than 30 days to pay invoices, despite the fact that Build UK members have signed up to the Construction Supply Chain Payment Charter which aims to ensure standard payment terms of 30 days and abolishing retentions.
The collapse of Carillion earlier this year came amid reports highlighting the fact that nine out of ten local authorities are breaking prompt payment rules which has led to the NFB declaring astonishment that Build UK has garnered praise from government Minister for Implementation, Oliver Dowden, despite barely fulfilling these legal obligations on payment. According to Dowden, “Government is leading by example in fair payment practices. All public sector organisations are required to pay undisputed invoices in 30 days and ensure this payment term is passed down the supply chain.” This is clearly not the case as shown by the late payment records of most local authorities.
According to national chair of the NFB, Neil Walters, “Fair practice is essential to changing the industry culture around payment, not transparency. Transparency is a legal requirement, not a bold step. Procurement regulations already require 30-day payment terms down the supply chain, but the first thing tier one contractors do is change the contract terms to suit their interests and all but force SMEs to sign the amended terms to get paid.”
The Subcontracting Growth 2018 research disclosed that 60% of subcontractors have suffered from bad debt in the last 12 months, with the average company writing off £16,149 each year. Bad debt is a serious issue for many construction business here in the UK. Bad debt usually occurs as a result of insolvency in the supply chain, protracted default or dispute and this is a particularly challenging issue for smaller companies that have already paid out for raw materials and labour. These businesses come under massive strain as a result of these late payments with many companies going out of business.
Almost a fifth of subcontractors revealed that the most common reason for not receiving the full amount billed was due to a customer going out of business. A change in the scope of the work involved during the project was to blame for 8%, which queries over the quality of the work and disputes over contracts accounted for 6% each.
The collapse of Carillion has put the spotlight on the three fundamental issues facing the construction industry – endemic late payment, bad debt and complexity of contracts. There are measures small companies can take to protect themselves against these issues, such as conducting debtor reviews, seeking advice on contract negotiation and considering bad debt protection, small business owners already have enough to do running their businesses.
Making a full and correct payment in accordance with the contract is a fundamental basis of the Government’s Construction Supply Chain Payment Charter.