Post Hero Image

The business case for prompt payment

Poor payment practices within many UK construction supply chains cause economic and social damage, and undermine the reputation of the industry. It’s time prompt payment became the norm not the exception.

When it comes to prompt payment in construction, conventional logic breaks down. In everyday life, we typically pay immediately and in full for goods and services, but in construction there is – too often – a tendency to delay payment or pay less than what is due. So said Kevin Thomas, chair of Constructing Excellence’s Collaborative Working Champions, introducing the subject of payment at the 10th February 2016 members’ forum at Pinsent Mason’s London offices.

Procure21’s Cliff Jones started the event’s presentations by defining prompt payment as “everyone paying what they are due at the earliest time – as soon as it is due (or earlier) – without delay.” From his perspective, good practice started at the top with the client; he argued that the client should also ensure their contractors do the same, but it should not just be up to the client: “industry needs to be proactive on payment issues too.”

Rob Driscoll from the Building Engineering Services Association and Smith & Williamson accountant Colin Hardman both highlighted the impact of delays. Late payment was a factor in one in five of all construction insolvencies, Colin said, while the burden also full disproportionately on small businesses. Of £41 billion currently paid late, £30 billion was due to SMEs, and late payment was the key factor in 4000 insolvency proceedings in a single year, reported Rob.

Payment progress

Over the past 12 years, 19 separate payment initiatives (charters, etc) have collectively failed to resolve the problem, but there are signs of improvement. Rob was cautiously optimistic that compulsory reporting and public league tables on payment (from April 2016) may shame larger businesses into improvements. Another Rob – Rob Taylor of the Environment Agency – described how project bank accounts (PBAs) had changed payment practices on its projects; £11.5bn-worth of UK government projects are already operating PBAs, he said, describing PBAs as “a form of collaboration system.”

With other aspects of project delivery gradually embracing 21st century digital approaches (BIM, for example) it seems anachronistic that construction payment has not been more automated – particularly when, as consumers, we can complete transactions via PayPal, pay bills instantly via BACS, etc. Madoc Batcup highlighted opportunities for payment to be automated once work had been verified as complete, and mentioned the potential of ‘blockchain’ technologies to accelerate authorised payments.

Textura Europe’s Andy Lambert described how construction payment management software had achieved widespread adoption in the US over the past 10 years: “Greater transparency, faster payment and certainty of payment breeds trust, breeds collaboration,” he said. It can also cut construction costs: Textura has surveyed UK subcontractors and identified that late payment risks led them to add 4% to bid costs, while they would discount 2.3% for early payment – something also identified in group discussions.

The forum divided into two groups, one looking at “Why are prompt payments essential?” the other: “Why is it necessary to delay payments?”

“Why is it necessary to delay payments?” “Why are prompt payments essential?”
When conditions/terms are not met:

  • product
  • design
  • defects
  • no evidence of compliance
  • non-performance

Financing issues:

  • year end
  • no cash
  • cash regeneration
  • financing/lending

Timing issues:

  • delivery too early
  • programme (not included)

Other:

  • culture and behaviours
  • “Because I can!”
  • a driver for positive industry change
  • lifeblood for many in the supply chain (avoids insolvencies and resulting costs)
  • removes finance costs
  • reduces collection costs (and dispute resolution costs) – ie: wasted effort
  • reduces supplier prices (do not need to factor in credit costs or payment risks)
  • generates trust, changes cultures and behaviours
  • facilitates investment
  • benefits customer reputations
  • above all, it’s ethical!

Developing an industry business case for prompt payment

As the table shows, reasons suggested for delayed payment were largely pragmatic (sometimes reflecting cashflow management more than anything else) along with a frank admission that old-school adversarial attitudes could still prevent prompt payment. The case for prompt payment, however, appears particularly strong, addressing various risks and inefficiencies caused by poor industry attitudes and behaviours. Resolving these will potentially deliver immediate financial benefits to projects and to the supply chain businesses involved; moreover, the industry ‘big picture’ might also be improved.

Poor payment practices are a factor in construction’s poor reputation, and the comparatively high levels of insolvencies among its supply chains add to that negative view, while also being wasteful and adding economic and social costs to the delivery of our built environment. Prompt payment is ethical, breeds trust and collaboration, and helps foster value-adding activities that enhance not just the reputation of all the parties involved on a project, but also of the industry as a whole. It is difficult to ignore the industry business case for prompt payment.

The presentations from the Constructing Excellence Members’ Forum on Fair Payment are available to download here.