Tackling late payment in the construction sector

Thousands of subcontractors were dealt a major blow at start of the year when construction giant Carillion went into liquidation. For these businesses, a bad situation was made much worse by the fact that they were owed significant sums of money for work they had long since completed. In the construction sector, late payment has persisted for too long, despite the fact that legislation has been in place to stamp out such behaviours for decades – 2018 marks the 20th anniversary of the Construction Act coming into effect.

Clearly more needs to be done to instigate wholesale change across the sector, but it would appear that, for some, late payment is becoming a something of a taboo. In the days after Carillion’s collapse, chief executive of Colmore Tang Construction, Andy Robinson, pledged to support subcontractors who were struggling as a result by paying them early and encouraged other firms to do the same.

Robust, well designed early payment programmes, balancing the needs of both the buyer and supplier, are a key part of the solution to late-payment

It’s highly encouraging to see construction companies like this recognise the myriad benefits of paying suppliers earlier and more efficiently and they’re far from alone. Indeed, many forward-thinking companies are realising the benefits that can be shared between businesses and their suppliers through an early payment programme. It is sadly ironic that Carillion’s suppliers were put into a less favourable position by the firm’s somewhat disingenuous approach to early payment. Rather than focusing on the long-term health of the supply chain, it appears to have been little more than a smoke screen for legitimising late payment.

Robust, well designed early payment programmes, balancing the needs of both the buyer and supplier, are a key part of the solution to late-payment. In our work with local authorities, we understand that an effective approach will incorporate the following principles:

1. Support the bottom of the chain: Businesses must differentiate between the their larger, cash-rich suppliers and micro businesses, which play a valuable role in so many supply chains.

2. Embed universal payment terms throughout the supply chain: In the public sector, 30 days should be the standard payment term across all contracts, regardless of category of supply, ensuring a common baseline against which suppliers price. Suppliers for these significant public-sector contracts should then be contractually obliged to operate symmetric terms with their sub-contractors. Otherwise, you end up in a perverse situation whereby a major supplier gets paid on day 30 and hoards cash, paying a small local business on day 120.

3. Give suppliers reasonable choice: If suppliers wish to be paid earlier than a 30-day term, there should be a commercial discussion. Finance isn’t free so it is perfectly reasonable for all but the smallest suppliers to be asked to offer up some commercial value, but equally that value should act as an incentive for buyers to get these suppliers paid swiftly.

If good can come out of Carillion’s collapse, it would be a recognition across the industry that late payment simply isn’t good business practice. In fact, the reverse is true, especially for the construction sector which relies heavily on a skilled sub-contractor workforce. It is encouraging that the issue is firmly in the spotlight, with a parliamentary inquiry underway to investigate the treatment of SMEs in the supply chain.

While further regulation may have a role to play in encouraging companies to adopt more efficient payment practices, it is equally important that businesses are aware of smarter procurement procedures and the benefits they can bring. All businesses should evaluate their own practices, talk to their suppliers and play their part in stamping out late payment.