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Subcontractors: How payment data shifts the power balance

Business businessmen businesswomen meeting table negotiations contract contracts deal

The supply chain can now see exactly how tier ones perform on payment. Binyamin Ali assesses what this means for contracting and how subcontractors can use the data to their advantage.

It’s been a good year for corporate transparency.

In April, all UK businesses with 250 or more employees were forced to reveal their gender pay gap statistics on a public database. In doing so, the construction sector was revealed to have the worst gender pay gap of any UK industry.

Now, attention has turned to payment practices.

Companies that satisfy at least two of three thresholds – £36m annual turnover, £18m balance sheet total, 250 employees or more – must publish data on their payment practices.

Unlike with gender pay gap statistics, the data is not grouped into industry sectors, so it is more difficult to draw comparisons between different industries (and some companies have later deadlines for submitting due to their financial years).

However, what is already clear is that the industry’s 20 biggest contractors by turnover (excluding Laing O’Rourke, which must file its first report by 30 October) take an average of 47 days to pay invoices.

With the data now available, what conclusions can the supply chain draw – and could it be used to change contractor behaviour?

How far does the data go?

As well as the average time taken to pay invoices, businesses must also publish:

  • Percentages of invoices paid in 30 days, those paid in 31-60 days and those paid in 61 days or more
  • Percentage of invoices not paid within agreed terms
  • Shortest standard payment period
  • Longest standard payment period

What the required data does not include, however, is the value bands of those invoices being settled on time and those being paid later than terms.

This could be problematic for members of the supply chain because, as one of the intended beneficiaries of the data, they cannot see whether a contractor is likely to prioritise large payments to bigger subcontractors ahead of small payments to the smallest subcontractors.

EY working capital services partner Matthew Evans suggests this was a deliberate decision by the Department for Business, Energy and Industrial Strategy (BEIS), because forcing companies to publish data on the value of invoices could actually work against SMEs.

“One thing the regulator is keen to ensure is that companies are looking after all payments, therefore they have taken a conscious decision not to weight it and not to ask for weighted numbers,” Mr Evans says.

EY working capital services manager Sam Robinson adds: “[This was done] primarily to help the small businesses. The feeling was companies would only focus on their large payments to their biggest suppliers, and actually if you weighted it by value, you might miss some of those smaller payments to smaller suppliers.”

“We have seen a large number of our clients spend quite a significant amount of time pulling the information and making sure it’s right” 

Matthew Evans, EY

Another potential issue is the fact that none of the numbers being published are audited, prompting concerns over whether firms could abuse the system and publish inaccurate data.

Mr Evans says EY’s clients are placing huge importance on ensuring their numbers are accurate, which, combined with the requirement that the data be signed off by a company director, gives him confidence that current safeguards are sufficient. “We have seen a large number of our clients spend quite a significant amount of time pulling the information and making sure it’s right,” he adds.

A survey among the EY’s clients showed 52.5 per cent of 249 respondents had spent or expected to spend 11 or more working days on their first submission. “Not only that: we’ve also seen, because there is a requirement to get director sign-off on this and the directors are criminally liable, the directors are taking an interest in terms of what the reports are saying.”

BEIS is leaning heavily on the prospect of criminal action keeping businesses honest.

A spokesman for the department told Construction News: “It is a criminal offence for businesses to fail to publish a report containing the necessary information […] or to intentionally publish misleading information. We are making payment behaviour a reputational issue for businesses through a transparent reporting requirement, companies, suppliers and other third parties comparing reports and publicising the information, [and] good payment behaviour by responsible companies leading the way.”

It will take time to gauge the effectiveness of pushing businesses to compete on payment practices, as the data begins to draw a clear picture of behaviour.

One thing this steady accumulation of payment data is unlikely to shine a light on is the impact of disputes on companies’ practices.

“There [are] obviously problems associated with how you separate out costs associated with legitimate reasons for not paying someone, because there are some problems with the work,” says Deloitte director in construction advisory Mike Cracknel.

He says Deloitte’s crane survey and construction surveys “have been suggesting the industry is extremely busy”, especially in London. “[As a result] sometimes quality dips and you can imagine scenarios [where] contractors might quite reasonably be withholding monies because works weren’t completed to the right standard.”

Alternatively, some contractors will use this as an excuse to withhold payment, he adds. “That’s why in a sense, as ever, the ability to drill into this data and get real clarity is very difficult,” Mr Cracknel explains.

How to take advantage of the data

Despite its limitations, the payment practice data can be used by those in the supply chain (including main contractors) to evaluate their business models or negotiate better payment terms.

For example, let’s say a subcontractor is about to sign a deal with a main contractor, the data for which shows it takes an average of 50 days to pay its invoices, only 40 per cent are paid within 30 days, and 60 per cent are not paid within agreed terms.

If the subcontractor’s contract terms state it will receive payment from the main contractor within 30 days, this would immediately put the subcontractor in a position where it can question the tier one on how it will meet these terms.

“This isn’t about one party in the supply chain being held up as good or bad. This is about how cash flows through the whole construction supply chain”

Suzannah Nichol, Build UK

Contractors can also use the data to scrutinise their business models by understanding their position within the supply chain, Mr Evans suggests. “Our clients […] are not just looking at their own terms […] and those of their competitors, but also their suppliers and their customers and understanding their role and position in the overall financing of the end-to-end supply chain,” he says.

As a result, firms in the supply chain can determine “whether or not [their position] is appropriately balanced with the risks they are taking and the margin they make”, he adds.

EY’s Mr Robinson says companies in other industries have already started exploring this and are attempting to get “commercial value […] in terms of whether that can help change their customer payment behaviour, or change the way some of their suppliers are paid”.

Build UK chief executive Suzannah Nichol points out that subcontractors being able to take informed positions with tier ones on payment is “something the industry has not been able to do before”.

She adds that, in the long term, the data could be used to gain insights on where payment flows are getting bogged down. “This isn’t about one party in the supply chain being held up as good or bad,” Ms Nichol says.

“This is about how cash flows through the whole construction supply chain. It’s not always linear – it can sometimes be circular. We recognise that cash is sticking somewhere. Getting all the data may identity where the cash sticks. Is it being used to fund other projects?”

Is this as good as it’s going to get?

The suggestion that larger businesses could be holding onto monies to shore up their own businesses is not a new one.

“You’re not necessarily going to be able to choose which counter-parties you work with, but this will at least give you a level playing field with all of their other suppliers” 

Sam Robinson, EY

But having real data on payment practice, no matter how limited, is a step towards improving the balance of power between small and large contractors, as Mr Robinson suggests. “In the construction world, you’re not necessarily going to be able to choose which counter-parties you work with, but this will at least give you a level playing field with all of their other suppliers,” he says.

Being able to compare a contractor’s standard terms is set to contribute to this rebalancing. But taking significant strides towards eradicating late payment in the sector will require a lot more than this early-stage transparency, according to Deloitte’s Mr Cracknel.

The biggest obstacle, he argues, is the fragmented nature of the industry. “It’s recognised that the smaller the company, the more exposed they are to late payment practices or being paid late, because their ability to influence the person paying them from above is reduced,” Mr Cracknel says.

“If you take a £50m project in London: you might have one main contractor and 20 subcontractors, but the number of people that operate below that and sit within the tier three and four levels, most people haven’t got a very good understanding of that.”

He suggests the certainty of programme and reduced fragmentation offered by offsite construction, as well as the increased transparency of nascent technologies such as blockchain, could support further progress.

For now, subcontractors are able to start pouring over the payment practices of the industry’s bigger players and potentially challenge the payment terms put on offer.

Having condemned late payment for so long, many in the supply chain now have a tool that represents a significant opportunity.

Readers' comments (1)

  • All this could be resolved in one swoop by a legal requirement to pay promptly, ie within 30 days.

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