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Project finance, liquidity and payment practices

This article summarises a sponsored webinar produced in association with Textura Europe

Webinar participants

  • Ian Armstrong, managing director, Greensill Capital
  • Paul Bamforth, UK managing director, Textura Europe
  • Rob Driscoll, head of commercial and legal, B&ES
  • Rebecca Evans, Editor, Construction News

Access to lending, prompt payment and liquidity are the holy trinity of running a successful construction business. But despite greater opportunities and a healthy pipeline of work, the growth of companies is being held back by late payment and lending restrictions. This having an impact on capacity and training, which in turn is fuelling cost inflation.

In an on-line poll conducted during the course of a CN webinar, half of those taking part (48 per cent) said that late payment was the biggest barrier to growth, followed by 32 per cent saying access to finance with 14 per cent citing non-payment. For the remaining few it was retentions.

So what can be done to break this vicious circle and what part can technology and supply chain finance play? Construction News in association with Textura convened a panel of experts to discuss these issues during the webinar that featured audience participation.

Lending and liquidity

Bank lending was beginning to thaw from the freeze during the recession, said our panellists. But it was still tough for construction firms to persuade banks to lend because they are still perceived as too high a risk.

“Recovery in construction tends to lag about 16 months”

Rob Driscoll, B&ES

Rob Driscoll, head of commercial and legal at umbrella body the Building & Engineering Services Association (B&ES), said that in the downturn bank lending dipped across the whole economy by 5 per cent, “but in construction that was 38 per cent, which has certainly restricted where you go for money.

“So I think that’s one of the big drivers. Another important thing to note is that the economy in construction shrank by 2 per cent over the last seven years where we had a triple drip. The economy is coming into recovery mode, but recovery in construction tends to lag about 16 months.”

Ian Armstrong, managing director of Greensill Capital, said: “In each of the meetings I’ve had across the sector, liquidity is the biggest areas of risk. And it’s the thing that is slowing down growth at the moment, that lack of access to liquidity.

“There are plenty of projects out there that everyone is trying to start, but getting funding to start those projects and then pushing that liquidity down through the supply chain to sub-contractors and paying them early is just not happening at the moment.

“Banks still consider construction to be one of the higher risk sectors, but that said, are moving back into lending and other companies coming in are willing to put liquidity into that space as well,” he added.

Payment practices

As our snap on-line poll highlighted, late payment represents the biggest barrier to growth. These results chimed with panellists’ observations.

“A consultation from the small business commissioner, regarding the enterprise bill which is going through the parliamentary process at the moment, says that the average SME is still owed between £28,000 and £30,000 in late payment.” He defined late payment, as payment not received within terms agreed.

“If we can get a process that brings faster payment and clarity, it will help everybody in the industry”

Ian Armstrong, Greensill Capital

Panellists said the length of payment terms was less important for suppliers than having the certainty of being paid on time, and that late payment wasn’t always deliberate, but down to inefficient processes.

Late payment forced firms further down the supply chain to “hold on to money for a rainy day rather than utilising that finance to innovate and grow,” said Mr Armstrong.

That in turn was fuelling skills shortages and restricting capacity. “They are all interrelated. So if we can get a process that brings faster payment and clarity, it will help everybody in the industry,” he said.

Failure of codes

Panellists were asked why the numerous initiatives to bring late payers into line, including the Prompt Payment Code and the Construction Supply Chain Payment Charter were having little impact. For Mr Driscoll the reason was simply because they had no teeth. “We operate in a free market economy where the government tends to take the least interventionist approach,” he said. “Codes and charters have never really worked since the Magna Carta because they are at best a political statement of promise.

“We have a legal system in the form of the Construction Act which is great if you want to acrimoniously hijack your paying partner and compromise the commercial relationship in order to recover your money”

Rob Driscoll, B&ES

“At the moment, the only teeth behind a code or a charter are that you can report the person and that might make a splash in the press which might affect your share price”.

He criticised construction’s legal framework for not being particularly helpful either. “We have a legal system in the form of the Construction Act which is great if you want to acrimoniously hijack your paying partner and compromise the commercial relationship in order to recover your money, but it has become a complex process.”

Paul Bamforth, UK managing director of Textura Europe, also agreed the various codes had had little impact, but he said the current skills crisis was forcing those at the top of the supply chain to behave better.

“Over the last 8 to 10 months I would say mind-sets are changing a little because the importance of the supply chain is growing.” He said clients are also demanding more transparency of payment down the supply chain, which panellists agreed was an important driver for change too.

Payment league tables

Mr Bamforth said that paying on time within 45 days was an important differentiator for the tier one contractors. “It won’t be too long before people can start getting published lists in this area of payment performance. And once you get things like that, we all know those that are running organisations don’t want to be at the bottom of a list.”

Mr Armstrong said everyone he had spoken to, from subcontractors right the way up to project owners, had said they would like the cash to flow faster. “Everyone’s trying to pay early, and everyone wants the cash to get down to the smaller businesses as quickly as possible, which actually suggests that there’s something wrong in the business process that isn’t allowing that.”

“Tier ones are in a place of economic recovery, which means the supply chain has become incredibly important to them”

Rob Driscoll, B&ES

Mr Driscoll also agreed that there seemed to be greater willingness to pay: “We have shifted away from the kind of typical subbie-bashing culture. We’ve mentioned that tier ones are in a place of economic recovery, which means the supply chain has become incredibly important to them – an ethical, good, stable supply chain.

“So managing that and making sure that supply chain wants to work for them in the first instance is incredibly important.”

What can improve the payment process?

Asked for their opinion on what would improve the current payment processes, 31 per cent of survey participants said digital or online processes, 27 per cent said more visibility, and nearly the same number wanted better standardisation.

“You can’t see where you are if there’s no data. And data can only be made available if the process is digitised”

Paul Bamforth, Textura Europe

Shorter payment terms didn’t really register, confirming what our panellists had said earlier.

Mr Bamforth made the point that digital payment and visibility go hand in hand. “You can’t see where you are if there’s no data. And data can only be made available if the process is digitised.”

Mr Bamforth’s company, Textura has developed software for the construction industry for managing digital payment which provides supply chain finance in partnership with financial services company Greensill Capital.

As Mr Driscoll pointed out, “The emergence of supply chain finance in the UK economy is allowing people to log on to the extranet portals of some of the tier one contractors and see in advance of legislative dates how much they might get paid, or how much the client of theirs is willing to pay them.

“They’ve never had that transparency. And that brings cash flow certainty, which means you can start to plan, grow, do things around that skill shortage, start to recruit, really get into a strategic position where you want to be over the next three years.”

The irony of BIM

Panellists applauded the government’s drive to improve the efficiency by digitising the construction process through the use of building information modelling. But they pointed out the irony of an antiquated process for managing payment. “So when we’re driving for productivity, that is an area where I think the benefit could be derived from starting to get digital data,” said Mr Armstrong.

“It makes sense to run this alongside BIM,” says Mr Bamforth. “BIM is a radical shift in industry and now there’s a realisation there’s technology in some other processes we should be moving towards. But it’s still very early days.”

Our panellists agreed, in a response to a question from the audience, that electronic payment systems established by a third party, or by the banks, at the start of the project, would be a good way to promote accountability and fairer payment.

Technology and disruptive influences

The perception of our panellists was the industry is slow to take up new technology and that it is ripe for outsiders to come into the market and shake things up a bit, in the same way that Netflix impacted on blockbuster or Uber on black cabs.

“I think there will be a number of different drivers. The skills shortage is one of them. That will introduce a generational churn, a breed of new thinkers. BIM is driving that slightly already,” said Mr Driscoll.

“Somebody at some point will break away from the pack and do what Netflix did in terms of the film industry, and left Blockbuster video standing”

Rob Driscoll, B&ES

“People who are used to retail banking in their personal lives will ask ‘why do you do it in such a dated, analogue system?’ If your bank can tell you when money moves in real time, why wouldn’t you be able to do that with your construction payment system?” he said.

And somebody at some point will break away from the pack and do what Netflix did in terms of the film industry, and left Blockbuster video standing. It might be a strange analogy, but it demonstrates the manifestation of digital disruption in any market, and somebody will have the initiative to take it,” he said.

“I think there is already enough outside influence to make it happen, and in any walk of life people only do something when they see the benefit themselves, and I think we’re at that point now,” added Mr Bamforth.

As Mr Armstrong pointed out, “the technology is there now as well. I don’t know a single person who doesn’t carry a smartphone. And smartphone gives you access to all the information you need to see on any project anywhere in the world.”

Supply chain finance – friend or foe?

The session ended with a discussion around supply chain finance and its impact on payment certainty and liquidity. Several tier one contractors have adopted the payment regime, but industry reaction has been mixed over fears of abuse and general confusion to purpose and benefits. The audience poll conducted during the webinar revealed that nine out of 10 participants were still unfamiliar with it.

Mr Driscoll said that if executed properly, supply chain finance is a benefit to the industry. “It is designed so that the large business can issue a bank with an amount that the receiving business is owed, ahead of the date when they are due to get paid. They can pay a small admin fee for the bank to pay them early.”

“It originated in the US under Obama and was adopted by David Cameron who urged businesses to get on board in the aftermath of the crash, so that a large company’s balance sheet could give liquidity to the smaller company who’s receiving money,” he said.

“Once people work out the fine balance for it, going forward a couple of years it will be a natural option that people can call upon”

Paul Bamforth, Textura Europe

“That is supply chain finance by definition, rolled out by people like Balfour Beatty in the correct ethical way.”

Other panellists agreed, saying that typically it uses the strongest credit rating within that supply chain to provide finance to the weaker parties. This means that when they’ve delivered goods or services in line with contracts, they can choose an early payment or not.

But they have the visibility to know the funds are coming on a set date in the future, and if they want them early they can get them.

Mr Driscoll said that reaction had been mixed and unpredictable amongst trade bodies, but said “there have been instances, and possibly still are where companies were seeing an opportunity to reverse that system, extending payment periods as it were, and charging people to get their money from the bank on the original dates, rather than early. So that’s the abuse of supply chain finance,” he said.

Panellists felt government had done its bit and it was now up to the industry to take it on board: “I think once people work out the fine balance for it, going forward a couple of years it will be a natural option that people can call upon,” concluded Mr Bamforth.

The full webinar can be accessed here

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