Digitising the supply chain
To many in the construction industry, late payment is a necessary evil. We almost take it for granted that some companies – often main contractors – will insist on long payment periods, but this credit can be abused as they find reasons to delay settlement of invoices until it suits them. This all adds to the cost of delivering construction projects, undermining the efforts of the UK government and other clients to achieve greater value from their supply chains.
Textura recently conducted a survey with Construction News looking at the impacts of late payment. It is clear this adversely affects subcontractors – they typically pay their suppliers more promptly than they receive payment. Comments included:
- “Despite our payment terms, contractors continue to pay us as and when they feel like and use the same reasons for non-payment (director needs to sign and he/she is on holiday, payment run isn’t for another 2 weeks, we didn’t receive your invoice, etc).”
- “Main Contractors are leaning on their supply chain as a banking facility to command growth.”
- “Everything is cut to the bone so big companies use late payments as free financing from small businesses.”
The hidden cost of late payment
As a result, many subcontractors have responded by inflating their tender prices to cover the costs they incur when their customers pay late. Staff spend additional time chasing payment, and a business has to finance the shortfall in its cash-flow by other means. Small wonder, therefore, that they build an allowance for late payment into their tender prices. Our survey, completed by over 100 repondents, suggests, on average, 4% is added to cover late payment – creating an additional hidden and unaddressed layer of cost to project delivery.
But if main contractors paid promptly – in under 30 days – our surveyed subcontractors said they would discount their prices by an average of 2.35%. In short, construction cost savings and improved margins could be achieved by more rapid settlement of invoices.
In line with the industry average, around 41% of work undertaken by our survey respondents was in the public sector. While over 90% of respondents support the government-backed Prompt Payment Code, it seems this needs strong policing across the whole payment chain (Construction News recently reported [link] that a significant number of public sector clients still insist on retentions, for example).
Time to digitise
We – and 60% of our survey respondents – believe that ‘digitising’ construction payment would be beneficial. As the industry is digitising, optimising and integrating collaborative design and construction processes (through BIM, etc), why isn’t it simultaneously digitising procurement and payment? It seems anachronistic that we can manage complex 21st century logistical challenges including offsite fabrication and just-in-time delivery, but many suppliers are victims of archaic construction payment practices redolent of the pre-Latham 1980s.
The industry has come a long way since then. After Latham, we had the Egan Report “Rethinking Construction”, we had the 2012 Construction Commitments, the Wolstenholme Report and “Construction 2025”. Since its foundation, Constructing Excellence has been a strong advocate of integrated working, and its calls for, alongside other things, adoption of common systems and processes and modern commercial arrangements echo what we champion at Textura.
Such improvements are also being championed by the Building & Engineering Services Association (B&ES) and its umbrella body, the Specialist Engineering Contractors’ Group. Rob Driscoll, head of B&ES’s commercial and legal team, has said:
“An online payment management system – such as Textura-CPM – would resolve the problem of how to implement and manage payment processes, making monitoring payment performance transparent and easily accessible.”
Expedite payment: add value
While the UK has raced ahead with its BIM adoption drive, a quiet revolution has been occurring in the US relating to payment management. By streamlining and automating large parts of their payment processes:
- Layton Construction was able to double revenues without adding any additional accounting staff
- Pankow saved the annual equivalent of two members of staff
- Mashburn Construction saved 7% of total project admin costs, improving margins and profitability
- GE Johnson saved its project managers and accounting team 210 man-hours per month
While late payment is one of the most significant issues facing UK subcontractors, our US experience shows that it can be tackled. These examples suggest significant benefits might be achieved by forward-looking UK construction businesses that in turn could help add value to their construction industry clients, helping achieve the targets set out in “Construction 2025”.
This is a guest blog from Andy Lambert of Textura Europe and Paul Wilkinson of pwcom.co.uk. We especially welcome submissions guest blogs from members of Constructing Excellence, so if you have a pitch for one please email it to firstname.lastname@example.org.