Late Payment Damages Sub-contractors
According to a report published late last year, some of the big property developers here in the UK are taking so long to pay smaller construction companies that it’s putting them at risk of bankruptcy! On average, it takes the larger property developers 56 days to pay their sub-contractors – this is two days later than last year’s average and this is causing smaller sub-contractors to experience cash flow problems that could see them going out of business.
It seems that this situation is not due to slow processes, or being remiss about making payments within a reasonable period. Major developers, apparently, reckon that they have something to gain by delaying payment and they know that the sub-contractors will be reluctant to raise the issue in case they lose out on work in the future, leaving them with a Hobson’s Choice – accept the slow payment or lose business going forward.
The manufacturers’ association, EEF (formerly known as the Engineering Employers’ Federation and the largest sectoral employers’ association in the UK) has been calling on the government to support businesses by investing in infrastructure and higher skills while lowering the cost of doing business.
A recent survey carried out by the EEF of 135 manufacturing managers clearly shows that three quarters of companies are actively planning to grow their business while just as many are determined to increase productivity. However, these plans for growth will be very difficult to achieve without support and if the companies are experiencing cash flow problems as they wait for their customers to pay.
Despite the Late Payment of Commercial Debts (Interest) Act which was introduced in order to speed up payments, UK companies still take two days longer to pay their bills (on average) than before the legislation was passed. To add insult to injury, the big boys, the larger companies tend to get paid in little over half the time that the smaller companies wait for settlement. It seems that the credit crunch has led to poor payment practice4s being ingrained in business practice and, now, an uncertain economic outlook has ensured that this is endemic across many sectors, not just construction. The problem is compounded by larger businesses expecting extended payment terms in contracts with their SME suppliers.
Naturally, the late payment issue has a knock on effect on other businesses too – suppliers further down the supply chain so it’s a practice that really isn’t good for the economy as a whole here in the UK, an economy that relies heavily on the SMEs that make up a hefty 99% of British business. The businesses that are being hardest hit by this situation are the smallest businesses, those with an annual turnover below £1 million. One way of guarding against this as a small business owner in the construction industry is to check the payment records of prospects and customers before entering into a binding contract. It could be worth checking the payment records of current customers too as we live in uncertain economic times and circumstances can change, with research showing that up to half of bad debts come from long standing customers.