The Financial Future of the Construction Industry – Going Digital
Research has established that one of the biggest barriers to growth in the UK construction industry is poor payment practices. Just as the UK construction industry is beginning to benefit from digitising processes, using software, apps and digital communication methods, digital payment processes also has its benefits and construction industry SMEs are being urged to go digital. Digital payment processes result in greater transparency, improved efficiencies and increased margins or profitability.
The construction industry is renowned for a lack of visibility for project participants, drawn out payment terms and expensive manual processes of application and certification. The construction sector accounts for 10% of UK employment and contributes to 8% of the economy so the impact of late payment is pretty serious, especially when you consider that SMEs comprise 99% of the 280,000 UK construction companies.
Small businesses spend on average 130 hours every year, at an average cost of £1,500 per business, chasing payments while incurring £180 million in debt interest charges! This is all money that could be working for the companies’ investment and growth at a time when the industry itself is in desperate need of capacity and innovation.
Research conducted in 2015 revealed that construction companies wait on average more than 15 weeks to receive payment and this is on the increase. Late payments (these are defined as payments received after a defined contractual date) was the leading cause of one in five construction company insolvencies, with most of this burden falling on smaller companies. Of the £41.5 billion late payments, £30 billion of this was due to SMEs.
As most SME owners will know, having a stable cash flow is essential when running a small business and if adopting digital payment methods can protect and enhance the steady cash flow, adopting these methods really should be a no-brainer.
While there have been numerous attempts to address the issue of late payments within the industry with charters, codes, regulations and other initiatives, there has been little improvement in the situation. For example, the Construction Supply Chain Payment Charter gained only 10 industry signatories in its first two years of operation.
The UK government’s Construction 2025 strategy emphasises the need to reduce late payments and has adopted an even tougher approach in the Government Construction Strategy 2016 – 20. The government itself is leading by example when it comes to prompt payment and the Public Contract Regulations 2015 require that all public sector organisations pay undisputed invoices in 30 days, whilst ensuring that this payment term is passed down the supply chain. The 2016 Strategy advocated embedding and increasing the use of digital technology in order to develop digital standards under the Digital Built Britain Strategy. The future success of the industry as a whole will depend on its ability to adapt to 21st Century practices and construction will need to adopt the following measures:
· Digital planning and design
· Lean processes and procedures (removing waste, adding value, etc.)
· More integrated supply chains
· Sustainable, whole-life thinking
· Off-site fabrication
· On-site automation and assembly
· Continuous performance management
· Key Performance Indicators (KPIs)
· Data connecting all operations, assets and people
· Just-in-time delivery.