Slow and late payments have been an ongoing issue in the construction industry for many years.
They have caused cashflow problems, project delays, and in extreme circumstances, liquidation.
There have been various efforts from government to clamp down on the issue, including regulations that require all public contracts to be paid within 30 days of an invoice being issued.
Despite this, a recent survey by the Electrical Contractors Association, the Building Engineering Services Association and SELECT, showed that 63 per cent of suppliers are still facing payment delays on public sector projects.
This year, we released the first Lloyds Bank Working Capital Index, a new business barometer that shows the pressure on businesses’ working capital. This is the amount of money tied up in the day-to-day costs of doing business.
The index gives regions, sectors and the whole of the UK a score based on the economic drivers of working capital.
The picture in construction
It is formed around a base score of 100, indicating that working capital is stable. Anything above 100 means that there is pressure to increase working capital, while anything below 100 means there is pressure to decrease it.
The construction industry scored 103.4. This tells us that while the sector is increasing the amount of money tied up in day-to-day costs, the pressure to do so is not as severe as the average UK business, where the figure was 104.1.
The reason for this unexpected score is because, although the construction sector saw slower growth than other sectors, payment times were the longest.
“This cycle is exacerbated by lengthy supply chains, which mean that any delay in payments has a cascading impact throughout the chain”
So why is this sector so prone to late payments?
The construction industry is unique in the way it does business.
It has incredibly low profit margins, which have been made worse by increasing costs for materials over recent years, and the ongoing battle for skilled workers causing labour costs to rise sharply.
This means that firms need to be more risk-averse with their finances, and manage the long cash cycles that come with construction contracts, ensuring they have enough capital and payments from customers in order to pay suppliers.
This cycle is exacerbated by lengthy supply chains, which mean that any delay in payments has a cascading impact throughout the chain.
How to successfully manage working capital
Although it may seem like a vicious circle, there are ways businesses, and therefore the industry, can improve their payment cycles.
An effective working capital management strategy can help firms manage risk and streamline business operations.
More importantly, it allows companies to release funds that can be invested back into the company, or held in cash to help deal with any surprises.
Speaking to a working capital specialist can improve a company’s cash flow, reduce potential risk posed by market uncertainty and, ultimately, help Britain’s construction sector prosper.
Llewelyn Mullooly is director of working capital at Lloyds Bank, Global Transaction Banking