The recession has not caused the issue of late payments, but it has exacerbated it. Katie Barker finds out how the issue affects the industry’s SMEs and what proactive action companies can take to attempt to lessen their impact.
- Less cash heighten late payment impact
- There are positives steps SMEs can take
- Standing strong
- Advice is available
- Holding onto cash
- The NSCC Fair Payment campaign
The news has been bleak in recent weeks and months for SMEs and specialists in the construction industry: insolvencies are yet to peak, the economy remains slow and restructuring is still going on at many firms, which will all be cause for concern for business owners.
Against this backdrop, late payments also been receiving a lot of attention, and although not a result of the recession, they are definitely exacerbated by it.
“Late payments remain the single most important factor affecting specialists contracting businesses,” says National Specialists Contractors Council chief executive Suzannah Nichol.
“According to the latest NSCC State of Trade Survey for Q4 2012, only 5 per cent of specialist contractors received payment within 30 days. Increasingly we hear about businesses facing insolvency due to poor cashflow – the effects of poor payment are evident.”
Less cash heighten late payment impact
This is not an issue confined to the construction industry, neither is it anything new, but as companies continue to try and stay solvent during the difficult economic times, they tend to keep less cash on their balance sheets meaning late payments have more of an impact.
“It’s something which is endemic in the industry but I don’t think it’s getting any worse,” says Crofton Design director Steve Hale. “At the moment some businesses are holding onto cash longer than they have previously, but average debtor days don’t seem to be increasing.
“If you hold cash it’s possible to ride it out but as balance sheets get weaker, companies become more reliant on cashflow and the issue of late payments comes to the forefront.”
The impact of late payment on smaller businesses further down the supply chain can be devastating. “Due to the nature of subcontracting within the industry the effects of poor payment and slow cashflow directly impacts on those companies that employ and train the workforce and carry out the majority of work on site,” says Ms Nichol.
“Poor payment practices increase the cost of projects and are holding back the innovation and growth this country so desperately needs,” she says.
There are positives steps SMEs can take
When faced with late payments, many SMEs feel powerless but Mr Hale says at Crofton they have several steps they take if they find themselves in that situation.
“When we first submit the bill, our accounts team will call about two weeks later to check it has arrived, and make sure there are no administrative problems. An incorrect invoice number can hold up payment significantly,” he says.
“When we are faced with a late payment our first port of call is ourselves. We hold debtor review meetings every two weeks to stay on top of the situation.
“We’ll often invoice the client for a job when a job is 99.5 per cent done but the clients won’t pay because it’s not complete. So first we check that the job is completely finished then go back and ask for payment. This solves half our problems because a happy client is much more likely to pay the bill.”
Ms Nichol agrees that SMEs should first look to themselves. “SMEs can start by getting their own house in order and being very clear to clients and contractors that for doing their job they expect to be paid,” she says.
Although this approach works in a lot of cases, some clients need a stronger incentive to pay up. “With difficult clients, we use the lawyers. If we’re sure we’ve done a good job and we know it’s just them being awkward and withholding payment then we will use the lawyers,” says Mr Hale.
Standing strong against clients can be difficult, especially as SMEs worry it might jeopardise any future work, but Ms Nichol believes it is vital for company survival. “It is easier to say than do but SMEs need to stand up for their businesses and ensure that they maintain their cash flow.
“If they under bid for work and are not being paid they cannot do what they do best, deliver a quality end product carried out by skilled and supervised workforce,” she says.
Advice is available
There are a lot of places SMEs can go to for support including trade associations, the government mystery shopper scheme and websites such as www.payontime.co.uk.
Although this issue is endemic in the industry, there are several ways both the government and those within the industry are attempting to tackle it.
Last month, business and enterprise minister Michael Fallon announced he was “going to war” on the issue of late payments, and has asked the chief executives of the FTSE 350 to sign up to the Prompt Payment Code.
And five years ago the NSCC also launched its Fair Payment campaign, which is designed to improve payment practices in the construction industry.
Holding onto cash
Mr Hale believes SMEs need to keep money on their balance sheets where possible, although after the four years the industry has been through that’s not an easy ask.
“SMEs tend to take too much money out of their business and become reliant on cashflow. We know late payment is endemic in the industry, so SMEs should keep enough cash to cover it and so shouldn’t just be reliant on cashflow.
“But it’s been a very tough four years, so it’s not always that simple,” he says.
SMEs can also take the situation into their own hands and speak out to publically name and shame companies that regularly withhold payment. “By raising awareness within the industry of poor payment and putting pressure on those who don’t pay on time and in full we can change our industry for the better,” says Ms Nichol.
“But let’s not forget those who are committed to paying on time such as Network Rail who are leading by example to show that we can work together as an industry to improve payment practices for the benefit of the supply chain, who can concentrate on delivering high quality projects rather than spending time chasing for payment.”
The NSCC Fair Payment campaign
The NSCC Fair Payment Campaign is designed to improve payment practices in the construction industry. The campaign calls for proper and timely payment and the elimination of retentions throughout the supply chain to improve the quality and delivery of construction projects.
While changing custom and practice is never easy, over the last five years the Fair Payment Campaign has:
- Established 30-day payment terms as the expectation within the industry;
- Led to payment within 30 days being required on government projects;
- Changed the Construction Act to improve certainty of payment to the supply chain;
- Published the Specialist Contractor’s Toolkit enabling the supply chain to get paid on time;
- Resulted in a clear and effective No Retention Policy.