More from: The Construction Top 100
We began collecting payment histories and trading experiences from construction companies at the beginning of the last recession in 1991.
Up until about 1996, the majority of slow payments were due to ‘can’t pay’ situations, where companies simply did not have sufficient cash flow to pay their bills on time.
But, over the past decade there has been a volte face. Most of the slow payments in this period have been due to ‘won’t pay’ attitudes; companies have the money to pay their bills on time but choose not to because they see their trade creditors as a cheap way to fund the business.
Experian data reveals average overdue payment days in the construction industry slowing from 14 days to 20 days between July 2007 and May 2008 and our own data reveals a similar pattern.
But the reason for the slowdown points to a return to the ‘can’t pay’ culture and we have seen the sharpest increase over the past six months.
We generally expect to see payments slow down in the winter months, particularly around Christmas when large chunks of the industry tend to shut down for a fortnight.
But the usual New Year buoyancy did not occur for 2008. In fact, demands made by some of the larger house builders for subcontractors and suppliers to slash their bills left many businesses wondering how long they would have to wait for their December 2007 invoices to be settled.
By early Spring there was no sign of fresh hope for the industry, just more doubt and pessimism as companies began publicly and privately expressing worries about the coming year.
Late spring brought whispers of dwindling order books from many of the smaller contractors, particularly those involved in residential and industrial newbuild.
This summer, many of the large house builders have attempted to slash their fixed costs by laying off large numbers of salaried staff. Privately-funded residential and commercial developments have also been shelved with hope for the immediate future being pinned on publicly-funded projects.
This July, the volume of overdue accounts passed to us for collection by our customers increased by 120 per cent compared with July 2007, and we are fully expecting this figure to increase further as the year goes on.
As far as the top 100 contractors go, we expect to see a pattern as their cash flow comes under increasing pressure. First, we predict that they will ask for extended credit terms from subcontractors and suppliers.
Second, the red tape surrounding payment processing will increase and more of the paperwork required to authorise payments will become “lost in the system”.
Third, we believe that those salaried staff still left in purchase ledger departments will become increasingly overworked and thus find it more difficult to process payments on time.
Finally, we expect to see more invoices flagged as “disputed” and put on hold for relatively minor reasons. The result of all this could be a dramatic slowdown in the time it takes for suppliers and subcontractors to get paid.