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Late payment: Is history repeating itself?

For much of the 70s and 80s, construction firms were among the most vulnerable businesses in the UK. With Carillion and late payment once again exposing the sector’s high-risk nature, Lucy Alderson discovers the realities being faced by subcontractors across the industry.

From the 70s through to the mid-80s, the likelihood of a construction company collapsing into insolvency was nearly twice as high as in any other industry.

This statistic, published in the 1984 report Analysis of the British Construction Industry, reflected a sector in poor condition.

With construction looking increasingly like a ticking timebomb as companies continued to go bust, it became clear the government needed to do something urgently.

Its solution was the Housing Grants Construction & Regeneration Act 1996, more commonly known as The Construction Act.

For the first time, contractors were given the right to refer any dispute over pay to adjudication. The aim was to ensure each party had a chance to represent its side of the story.

But despite this initiative, a culture of late payment still exists. In fact, the number of insolvencies in the industry is starting to creep up.

The number of collapsed firms jumped 8 per cent to 2,633 in the year to 30 September 2017, according to research by accountant Moore Stephens.

This doesn’t take into account the impact Carillion’s liquidation has had – and will continue to have – on the supply chain.

Following this collapse, the industry is showing similarities to the conditions it experienced 40 years ago. It has also exposed how fragile the supply chain can be, with companies forced under and thousands of staff and apprentices left out of work.

However, recent government legislation – the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 – could offer a timely intervention.

All UK companies with turnover greater than £36m and 250 employees or more now have to submit information on their payment practices covering a six-month period. This information must be re-submitted every six months with the latest data and is publicly available.

According to the data, the industry’s biggest contractors take an average of 47 days to pay invoices. Yet investigations conducted by Construction News suggest equivalent figures across the wider industry could be far higher.

CN asked readers for their experiences of late payment and has since spoken with more than 50 specialist subcontractors and SMEs about their experiences of late payment.

Docking pay with no explanation, withholding pay to boost end-of-year results and squeezing pricing on contracts are just some of the tactics certain larger contractors are said to be using to hold onto cash for as long as possible.

Meanwhile, the industry’s supply chain is being starved of cash, with some companies taking drastic measures to stay afloat.

Why are we waiting?

Late payment is a systemic industry issue. The reasons why this practice is used were summarised well by British Board of Agrément chief executive Claire Curtis-Thomas.

Speaking at a select committee hearing on Dame Hackitt’s review of Building Regulations, Ms Curtis-Thomas said that many main contractors start projects from a loss-making position due to the unsustainably low margins their businesses operate on.

Furthermore, many public sector contracts are tendered on lowest price ahead of quality, which means contractors will have gone in lean on costs in order to win the project.

This, she argued, is leading contractors to “go about subbie-bashing” to drive down costs and therefore shore up their own positions when delivering these projects.

Late payment is one tactic used as part of this.

Although contractors have been forced to make their payment practices public and the data shows the biggest contractors pay within 47 days on average, anecdotal evidence suggests this figure may not reflect what’s happening across the wider industry.

One quantity surveyor who works for a main contractor says: “In all cases on government-funded schemes, no contractors pass on 30-day terms,” adding that most make their supply chain wait 60 days for payment.

Many companies agreed 60 days is the average amount of time they wait to be paid by main contractors on public sector projects – even though it is a government requirement that they be paid within 30 days.

However, Taylor Wessing senior counsel Natalie Pilagos estimates that smaller firms could actually be waiting several years before they see money owed, if disputes over pay arise following a project hitting difficulties or delays.

“You tend to find at the start of the job, [the length of time waiting for payment] wouldn’t be as bad as that,” she says. “But as you go through a job and problems arise, it wouldn’t surprise me if this was longer than 90 days. It could be years to resolve all the issues and get paid.”

Typical late payment tactics

CN’s investigations have found that certain contractors are using a number of different tactics to hold onto payment for as long as possible.

Battling for retention monies is one of the most common issues subcontractors have cited, with some, such as M&E and building services firm Bmech Services, waiting on many thousands of pounds.

Bmech Services was a supplier to the now defunct specialist contractor Vaughan Engineering. When Vaughan Engineering fell into administration in March this year, Bmech Services took a £35,000 loss on money it was owed and had been chasing from the firm, which included nearly £16,000 in retention monies.

Bmech Services managing director Rob Ditchfield explains the impact this had one the business. “We turn over about £2m a year and we only make £80,000 a year,” he says. “We’re not a big company so that’s hell of a lot of money to us. The past year has been a nightmare.”

“You tend to find at the start of the job, [the length of time waiting for payment] wouldn’t be as bad as that. But as you go through a job and problems arise, it wouldn’t surprise me if this was longer than 90 days”

Natalie Pilagos, Taylor Wessing

Vaughan Engineering used a number of tactics to play for time and hold onto cash owed to the business, Mr Ditchfield alleges.

On occasion, cheques would be sent out without stamps on the envelopes and would therefore be held up at the post office. Mr Ditchfield says he was contacted by the post office to pick up this letter, which delayed the process of cashing in the cheque.

When ringing up the company to chase payments, Mr Ditchfield says he would be redirected to several of Vaughan offices in Warrington, Scotland and Ireland and told each time to ring another office for assistance.

“It wasn’t far off putting us under, to be honest,” Mr Ditchfield says. “It’s us smaller companies at the bottom of the ladder that pay for it.”

Other companies tell CN that a common excuse used to explain late payment to suppliers is administrative delays.

“The excuse we often get is that [main contractors] didn’t get the papers to accounts on time,” says one specialist subcontractor.

Another adds: “We send in payment applications and are then told the [main contractor is] still waiting for this payment to be approved.”

A pattern seems to appear around exactly when main contractors hold back payments from the supply chain throughout the year.

Many companies say the summer period around June and the Christmas period are when late payments are particularly pronounced. This correlates with the periods before companies record their half-year and year-end financial results, which could indicate that main contractors are shoring up cash to boost their balance sheets.

For example, one small firm says its client delayed a payment of £134,000 that was due in December until January the following year.

In addition, main contractors will dock money from final payments to subcontractors with few, poor or no excuses made to justify why this has been done, many subcontractors claim.

This is often a last-ditch attempt made by contractors to keep hold of as much money as possible, Ms Pilagos suggests. “As you get towards the end, contractors are reluctant to release the retention money (for a variety of reasons) and try to find reasons to offset the amount,” she says. “It’s also their last chance to hold onto money.”

Impact on subbies

Constantly battling for money has wide-ranging consequences for small businesses, both in terms of the financial implications and the human impact on those working at these firms.

One company tells CN is has been “pushed to the brink” over the last 18 months due to payment delays on two of it major projects. When this subcontractor has threatened its clients with adjudication in the past, many agree to settle out of court.

The subcontractor argues that this shows main contractors are merely biding their time paying the supply chain, instead of actually disputing the work conducted by these companies. “What sort of society allows this on an industrial scale, considering the very real human misery it produces?” the subcontractor adds.

“For a long time, we have had to repeatedly chase out retention payments, often getting no response at all for many months. We have regular work with this client, so me and my two co-directors are reluctant to be forceful for fear of biting the hand that feeds us”

Subcontractor

The future of retentions is currently up for debate, with a number of major contractors advocating an outright ban while many specialists favour measures to hold retentions in trusts. Meanwhile one of the UK’s largest clients Network Rail is seeking to crack down on its contractors’ use of retentions.

But for now, if a main contractor is a repeat customer, subcontractors have to decide whether to aggressively pursue payment at the risk of losing future work. And what of tier ones who are themselves subject to retentions and late payment from clients?

One subcontractor explains the dilemma: “For a long time, we have had to repeatedly chase out retention payments, often getting no response at all for many months,” they say. “We have regular work with this client, so me and my two co-directors are reluctant to be forceful for fear of biting the hand that feeds us.”

In your words: what can help?

Some subcontractors are taking matters into their own hands to deal with this culture of late payment, such as one design-and-build cladding firm.

Although the specialist says 25 per cent of its work “unavoidably” comes from working under main contractors, it experiences “very few examples of poor payment” because it tries to work directly for clients.

Many small companies are becoming increasingly selective about who they work for. One small M&E business says: “We have just decided we would rather do less work [but] for nicer people and keep our workforce happy, rather than face the tyranny of these larger businesses.

“Large main contractors in construction simply bully the supply chain continually… I fear the industry will continue to lose skilled people and businesses simply because they can’t get paid in a reasonable time for the work they have done.”

Because of the number of payment disputes subcontractors face and the administrative burden this presents, many companies are hiring in-house professionals whose sole job is to chase and recover delayed payment.

Indeed, one SME says it spends more time preparing court documentation than running the day-to-day business.

For many frustrated subcontractors, action from the government is needed to tackle the issue head on.

“Why doesn’t the Cabinet Office make it simple?” one subcontractor asks. “All tier ones carrying out work on all government contracts should pay their supply chain in 28 days. The government needs to lead by example and make sure this [payment] is simple and transparent.”

From the experiences subcontractors have shared with CN, it is clear that this culture of late payment is squeezing the industry’s subcontractors, causing financial strain and misery for many companies.

This mode of operating is clearly unsustainable.

Leave the situation as it is, and it is not unrealistic to think we could see the industry pushed to the same breaking point it was at 30 years ago.

Readers' comments (1)

  • Excellent report. No surprises but clearly show the problem, which no amount of dreamy industry strategy reports about how to be a great industry can overturn. While this goes on across the industry, construction cannot possibly become an efficient ad innovative industry. Good payment practice needs to be set by law, and the public sector must work only with demonstrable good payers.

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