Why late payment hits the construction sector hardest

Businesses in the construction sector have been hit hardest of any UK sector by longer waits for their invoices to be paid, with delays increasing 22 per cent in the last year from 67 days to 82 days.

The Asset Based Finance Association (ABFA) ;says UK businesses now face an average wait of 61 days; just a 2 per cent increase from 60 days last year, putting into perspective the problems facing construction in regard to late payment.

But the organisation points out that the construction sector has a particularly long supply chain which includes many small and medium-sized enterprises (SMEs), and explains that delays in paying contractors will put jobs at risk all along the supply chain.

The ABFA says that slow payment of bills is a major reason why the construction sector has such a high number of insolvencies. Last year 17 per cent of all corporate insolvencies were businesses in the construction sector.

Jeff Longhurst, chief executive of the ABFA says that the sector has a real problem getting clients to pay early on and the huge number of construction companies that became insolvent last year only goes to show how bad the problem is.

‘Long supply chains in industries like construction mean that the ripple effect of delays is likely to affect many other businesses further down, with SMEs hit the hardest. In an industry with high overheads in terms of materials and labour costs, this can be difficult to deal with,’ he adds.

‘This will only add to the woes of the construction sector, which has been among the hardest hit by the uncertainty surrounding Brexit.’

Cash flow problems unsurprising in the industry

Aamar Aslam, CEO of online invoice trading platform Funding Invoice says that, with some firms waiting an entire financial quarter to be paid for just one job, it is unsurprising that construction firms suffer from cash flow problems.

‘Many independents in the construction sector look to finance providers so that they can pay their own staff’s wages during the ‘payment gap’ from services delivered to funds paid,’ says Aslam.

‘In these scenarios, no person or business gets paid until the first person does. An end customer will hire a large construction firm for a job, who will then hire several independents for different elements, and these independents in turn will also hire other third parties.

‘The payment has to go from the end customer, through the large construction firm and the first round of SMEs, before the final part of the supply chain is paid.’

SMEs in the lurch

These payment terms are an ‘unsustainable waterfall’, according to Aslam, and require intervention to prevent small businesses in the construction sector from closing down. ‘The promised Small Business Commissioner has still not yet been appointed, leaving many SMEs in the lurch and unable to help themselves when they are suffering from late payments.’

John Woodward at C&D Consultancy works extensively across the construction sector providing technical demolition expertise to companies involved in residential, commercial and industrial property.

In recent months, the company has seen an increasing number of firms ignoring The Construction Act, which is intended to ensure that payments are made promptly throughout the supply chain and that disputes are resolved swiftly, with regards to payment terms. ‘Thirty days was the norm, but this is now being stretched to 90 or, in the more extreme, cases 120 days,’ Woodward says.

‘This is even worse news for us as those terms are usually for the demolition contractors, who have already been squeezed on price. These are ultimately our customers so we have to wait a further length of time before they pay us.’

Further reading on late payment

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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