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Are SMEs being taken for a ride by cowboy clients?

A quarter of firms are waiting up to four months for payment, a fifth cite late payment as a drag on expansion plans, and 5 per cent need to withhold wages and salaries from staff – all due to late payment issues.

To add to that, almost 10 per cent of firms surveyed went out of business due to late payment.

It is an issue that has dogged the construction industry for decades. Administrator’s reports often cite payment issues as a factor in bringing down well-run firms.

The FMB has dubbed late-paying clients and large (read: tier one) contractors as cowboys.

But when the public sector is also included in the blame game, is it really cowboy behaviour from a few firms that is to blame, or actually the quiet acquiescence from many within the sector?

A report published in August revealed that nearly two-thirds of SMEs are not being paid for public sector work within the required 30 days.

The problem of late payments spreads like a virus and its symptoms arguably turn up everywhere you look.

Productivity levels in construction are notoriously bad, and have barely improved in decades. A series of reports have found that the supply chain is disjointed and fragmented.

How late payments relate to these issues is an intriguing question that needs to be better understood. How many SMEs would or could use the money withheld by late payers to grow, invest or innovate?

The government has woken up to the issue, with the long-awaited consultation on retentions launched by the Department for Business, Energy and Industrial Strategy (BEIS) a welcome move.

However, without action the consultation could end up as yet another report left to gather dust while the problem goes on.

The government has been spurred to act on the back of an impact assessment conducted by Pye Tait on behalf of BEIS, which found that the estimated amount held in industry retentions in England over the course of a given year is £3.2bn-£5.9bn (in 2015 prices).

The report comes at the same time as yet another study by the National Federation of Builders that the construction industry was the worst-offending sector of the UK economy when it came to late payments, with SMEs owed up to £30bn in unpaid invoices.

Imagine: what would a £30bn cash injection do for the industry’s smaller players?

I would hazard a guess that the effect would be substantial.

Labour leader Jeremy Corbyn referenced the issue at the CBI conference today, noting that Labour was ready to look into the late payment problem across all business sectors.

The big question for construction is whether the industry has the motivation to tackle this issue by itself once and for all, or instead see mandatory legislation imposed on it from above.

Readers' comments (1)

  • Not a lot of use complaining when the solution is in your own hands. Why use standard forms that do not address the matter. It is a simple matter to introduce a pre-funded escrow account or revolving letter of credit (should not be a problem with a reputable client but may involve negotiations at a higher level than usual (remember both sides can propose and agree modifications to the Ts and Cs). The result is payment on Certificate presentation (remember the payment period iis the maximum period for payment and payment should actually be much earlier. Whilst you are doing this agree a Bank Guarantee or bond in lieu of retention.

    Lobby the standard form bodies (ensure you are represented on those bodies not just by trade associations).

    The best christmas present you could give your commercial director, you do have to get together and go out and get it though.

    David A Roberts

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