Payment is one of the biggest and most emotive industry problems. Construction News and Textura Europe brought contractors, consultants and experts together to debate solutions and ask what role new technologies and government measures should play.
- Long payment vs late payment
- Why late payment?
- Digital solutions
- Is supply chain finance the answer?
- What the future holds
- Market influence
The apparent failure to stamp out poor industry payment practices is not for want of trying.
The sector is awash with government-led initiatives including the Construction Supply Chain Charter, project bank accounts, the Public Contracts Regulations 2015 and the Prompt Payment Code to mention just four of the 19 launched in the past two years.
But the fact remains: payment is still the most emotive issue in construction, splitting the sector along tribal lines and all too frequently forcing perfectly healthy companies into administration when invoices are not paid on time.
Research carried out by Textura Europe and shared exclusively with Construction News last month reaffirmed the problems.
More than a third – 35.8 per cent – of respondents said their average wait for payment was more than 60 days after an invoice was raised.
Among main contractors, more than one in three said they waited more than 60 days, with around one in six (15.8 per cent) waiting in excess of 75 days.
Among subcontractors, more than a quarter (26.9 per cent) said it took on average more than 60 days to be paid, while around the same proportion took 60 days to make payments themselves.
And nearly four in 10 main contractors (36.8 per cent) took in excess of 60 days to make payments, with 18.4 per cent admitting to paying more than 75 days after receiving invoices.
So far, so disappointing. But is there a medicine that will remedy this debilitating industry malaise?
- Ian Armstrong, managing director, Greensill Capital
- Paul Bamforth, UK managing director, Textura Europe
- Sean Bradley, commercial director, Bam Construction
- Steve Button, group procurement manager, Lakehouse
- Rob Driscoll, head of department, B&ES
- Graham Dundas, deputy chief finance officer, Willmott Dixon
- Lex Greensill, CEO, Greensill Capital
- Andrew Hudson, partner, Arcadis
- Graham Robinson, global business consultant, Pinsent Masons
- Colin Smith, president, Textura Europe
- Dale Turner, director of procurement, Skanska
- Paul Wilkinson, director, PWCom
This was at the centre of our debate when procurement and finance experts from contractors and consultants came together to discuss liquidity and project finance.
Contributors had no expectation of a silver bullet, but the discussion highlighted a changing industry dynamic and an acknowledgement that prompt payment provides mutual benefits across the industry.
The emergence of project bank accounts and low interest rates has already made it less worthwhile financially for contractors to hold on to their suppliers’ cash as a means of making money.
The discussion brought home that the days of a contracting model that expects SMEs to finance projects are numbered.
Long payment vs late payment
The discussion began by addressing a critical point: what actually constitutes late payment?
As the Textura survey highlighted, many companies are still having to wait for their money. But is the extent of the problem being distorted because suppliers simply don’t understand the terms they’ve signed up to?
B&ES department head Rob Driscoll said late payment on the back of the recession and the fall in bank lending was indisputable.
“It is a really complicated industry, and the business model doesn’t work anymore”
Graham Robinson, Pinsent Masons
But he also argued that it can be difficult to distinguish late payment from legitimate hold-ups.
“I do believe that no matter what happens in the relationship, the first thing you then do is stop payment,” he said. “So some of what are perceived as late payments may be valid disputes.”
For Willmott Dixon deputy chief finance officer Graham Dundas, clarity in the contract is crucial: “We are in an industry where there are a lot of hoops to jump through and it’s important to know what they are.
“Once you’ve established clarity around the terms [and] what getting paid looks like in terms of the process… then, subject to genuine disputes, there’s really no excuse for late payment.”
Skanska director of procurement Dale Turner agreed: “Apart from disputes, if you’ve contracted on something and you don’t honour that, that’s late payment. It’s quite simple.”
The government claims it already pays more than 80 per cent of its invoices within five days and all public sector bodies are required to pay invoices within 30 days.
It would like to see that as standard practice and is encouraging firms to sign up to its Prompt Payment Code.
That said, Lex Greensill, CEO of Greensill Capital, who is also a crown representative and government adviser, suggested Whitehall was more concerned about companies not paying on the agreed date, be that 30 or 60 days.
Lakehouse group procurement manager Steve Button explained how misunderstandings about late payment commonly arise: “Our standard payment terms are 45 days but we do have shorter terms to suit companies we’ve done particular deals with.
“But we’re clear about the payment terms up front. A problem we sometimes have is that we give set dates to put invoices in and they put it in late, so it delays the application being processed.”
Why late payment?
There is no shortage of reasons given for late payment, ranging from complex legislation to embedded culture.
For Pinsent Masons global consultant Graham Robinson, contracting’s financial model is at fault: “It is a really complicated industry, and the business model doesn’t work anymore.
“We expect the lowest level of the supply chain to finance the project, which is completely wrong.
“We ask ourselves if we always get the best return from our supply chain, and I sometimes think the answer is no”
Sean Bradley, Bam Construction
“There’s another bigger issue: the major contractors are running out of cash.”
A 2014 KPMG report found the net cash balances and operating margins of 14 major contractors to be at their lowest level since the start of the last recession.
This year’s CN100 told a similar story: the average operating profit margin for the top 25 firms fell to just 1.2 per cent, down from 2.5 per cent the previous year.
Bam Construction commercial director Sean Bradley reflected on this: “Late payment depends on whether there is enough money in the first place.
“Culture and behaviour are determined by that. We often find payment issues on projects that were never quite right in the first place.”
He stressed that Bam was committed to 30-day terms, but conceded: “We’ve had discussions whether we should be changing that model.
“We ask ourselves if we always get the best return from our supply chain, and I sometimes think the answer is no. But long payment terms are to the detriment of the industry.”
Building information modelling may be beginning to make its mark on the industry, but “conservative” was a word used frequently to describe attitudes to innovation.
A common view around the table was that payment processes are ripe for modernisation – leading to greater transparency and accuracy.
As Mr Driscoll pointed out: “We cannot utilise BIM savings until we digitise payment, because you’re only digitising half the construction process.”
Textura Europe president Colin Smith continued: “It’s a fundamental issue. As [the payment cycle] is not digital, lots of information is completely outside of the loop.
“It’s therefore outside any government scrutiny or ability to forecast.”
Join the debate: Payment webinar
Got a view on payment? Sign up for our Project Finance & Liquidity webinar on 18 November, in association with Textura Europe, to continue the debate.
Textura, he added, had developed software for the industry to digitise payment, known as Textura-Construction Payment Management, and more recently an accompanying early payment service for suppliers that provides supply chain finance.
Lakehouse is carrying out a 12-month pilot using Textura software in its construction and regeneration divisions. Once the pilot is completed it will look to roll out the process across other areas of the business.
“I think Build UK could encourage everybody to sign up. It won’t happen overnight but it would be great if we could get the top 20 main contractors”
Dale Turner, Skanska
“We want to be easier to work with and give the supply chain transparency over when they’re getting paid, what’s been certified, what’s holding things up and why it’s not happening,” Mr Button explained.
Willmott Dixon has also digitised payment procedures. “Over the past 18 months we’ve been building our own commercial system to deal with that end-to-end subcontract process,” deputy CFO Mr Dundas said.
“You need a culture to underpin it, whether you have a paper process or a digital one. Digital helps managers identify where the culture you want to implement isn’t being followed.”
He said: “There’s other benefits, even down to the number of calls to the finance team. We were getting 1,000 of those calls a week, people just wanting to check it had gone through.” Now, he added, they can see it online.
The feeling was that linking payment with BIM, while possible in theory, was some way off becoming a reality – though BIM’s adoption was perhaps driving new procurement methodology and fostering trust by forcing more collaborative working.
Textura Europe MD Paul Bamforth observed that, while BIM was talked about a great deal for certain types of projects, the industry didn’t seemed to have fully bought into it as a means to collaborate.
Mr Wilkinson pointed out that there was concern as to whether the government will push on with its 2016 deadline for mandating BIM on public projects: “We’re seeing some possible signals such as a slimmed down Construction Leadership Council, and no replacement for the chief construction adviser Peter Hansford.”
But he added: “There are some businesses that have gone so far down the road that they have seen the advantages, and there’s no way they’re going to go back to the old way of doing things.”
Is supply chain finance the answer?
One of the more innovative – some would say controversial – developments has been the adoption of supply chain finance among contracting firms, including Balfour Beatty, Carillion and Willmott Dixon.
Supply chain finance simply refers to the use of a third party to fund – at a small cost – early payment of suppliers’ invoices.
Textura’s Early Payment Program, for example, was developed in partnership with financial services company Greensill Capital.
Textura provides the technology for EPP via its Construction Payment Management software, while Greensill performs the underwriting and provides the funding.
Main contractors using EPP can offer subcontractors the option of being paid ahead of normal payment timing, in exchange for a fee based on the certified amount.
“There’s a very interesting model coming to Britain. It’s revolutionising things in the US, and that revolution is going to come here”
Lex Greensill, Greensill Capital
Willmott Dixon has been one of the early adopters of supply chain finance, launching it in June 2014. “We went about developing a system that we would happily sign up to if it was offered by our clients,” deputy CFO Mr Dundas explained.
“We don’t charge additional fees, we don’t make any money out of it. It’s optional, you can opt out of it at any time and there’s no cost to our supply chain for getting paid with it.
“As a result of that, when we first went into it, we’ve got 600 suppliers, which is the first group we offered it to, and 200 signed up.
“Lloyds Bank, our partners, said, ‘Well, you’ll be lucky if you get a 10 per cent uptake’.
“I think the downsides are that it’s a little more complex than perhaps it needs to be, because it is legally a factoring arrangement. But it’s been a genuine win-win solution to some of problems round the table.”
Mr Dundas added that he expected a steady increase in the number of suppliers who wanted to sign up – but that many wouldn’t because they were happy with the existing 30-day payment terms.
What the future holds
The plethora of late payment initiatives may eventually have an impact. But what else will drive change?
One development many are looking to is the joining together of specialist and major contractor trade groups to form Build UK.
It is hoped this will lead to constructive dialogue on late payment and also encourage more main contractors to sign up to the Construction Supply Chain Payment Charter.
The charter sets out the industry’s ambition for payment terms of 30 days by 2018 and no cash retention by 2025.
At the time of its launch in April 2014, nine companies signed up, but there is little evidence this number has progressed since. Its website, for example, shows only two companies signed – and none of the original nine.
Skanska was one of the original signatories. “It’s our statement of what we really want to do as an ethical contractor,” said procurement director Mr Turner.
“I think Build UK could encourage everybody to sign up. It won’t happen overnight but it would be great if we could get the top 20 main contractors.”
Asked what was holding it back, a number of reasons were put forward, including the potential misunderstanding that capital doesn’t necessarily have to be on the contractor’s balance sheet to be able to meet payment terms; that it can “come from elsewhere”, as Mr Greensill pointed out.
Above all, it was suggested that 19 government initiatives in two years had left the industry indifferent and unengaged.
The question was also raised as to whether a charter could be effective if it was not properly monitored. “To my mind, there is too much initiative and not enough strategy,” said Arcadis partner Andrew Hudson.
Several panellists pointed out the need for good clients as a mainstay of driving industry innovation and best practice, but that, ultimately, any improvement in payment comes down to the market.
Mr Hudson argued: “We all know contractors and subcontractors are in a strong position with clients. So some clients are struggling to get contractor engagement because they have bad reputations and people are saying, ‘I don’t want to work for you’.
“So it’ll be interesting to see how that settles down in the next two or three years.
“That’s one way the market can work against the client, and they may have to change their behaviours. Good clients are managing to hold their prices because their suppliers are mindful of a downturn at some point.”
Greensill Capital MD Ian Armstrong agreed that in a skills shortage you want your preferred suppliers coming back, so treating them properly was essential.
For Mr Greensill, shortening payment times through technology and supply chain management was an inevitability thanks to the costs it could take out of the project.
Drawing on experience in the US, he said payments to subcontractors had in some cases been cut down from an average of 51 days to between three and five days, which allowed them to buy materials more cheaply.
“Obviously if the folks here are then able to capture some of that value and deliver it through to clients, that’s a very interesting model,” Mr Greensill noted.
“And that’s what I think is coming to Britain. It’s revolutionising things in the US, and that revolution is going to come here.
“It’s going to change the whole way the industry works.”