The Contentious Issue of Payment Practices in the Construction Industry

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Late payments have been a feature in blogs on the Small Business Commissioner website in the last few months.  The construction industry in particular seems to have big issues and I wanted to know: How big is the problem and what is the impact on the wellbeing of SME’s in this sector?

During the course of my research I interviewed SME construction business owners and workers, accountants and debt collectors, to get a balanced view.[1]  What I found out is both shocking and alarming.

What is Driving the Late Payment Issues?

Across the board ALL sources reported that late payments and sometimes no payment at all is common practice in the construction industry.  Yet the sub-contractors have contracts in place and the Government set up the Construction Supply Chain Payment Charter that sets out payment terms of 30 days, so why does this continue to be an issue?

Here were the common complaints:

  • Cash retention is common practice.  Withholding of a percentage of payment on construction work until it is certified as being free of defects. The message from various sources is that this is being used as a payment delaying technique and often as a reason for not paying at all.[2] When Carillion went into liquidation they left an estimated 30,000 creditors, which were predominately small and medium-sized businesses. It is also estimated that Carillion held £800 million of retention payments on entering liquidation.[3]
  • Retentions are problematic for all parties in the supply chain as the late payment gets passed down the chain, whilst companies still have to pay bills and pay workers.
  • Smaller companies do not have the robust cash flow to ride the peaks and troughs of payments.
  • While every sub-contractor has the opportunity to report malpractice, they are reticent to do so, knowing they are unlikely to get further work if they do so. 
  • For the main contractor to win the account it is likely that their own profit margins are very small with a global focus on more for less.
  • The cost of fighting any claim is restrictively expensive, time consuming and they would be going up against bigger companies with retained lawyers.
  • If others in the supply chain are delayed, then then they are late and can be in late payment clause before they start, and can be held accountable for late completion.

Impact

Whilst the inevitable result will be some companies going out of business because they are unable to survive the cash flow roller coaster, it is also driving other behaviours that are undesirable.

  • Sub-contractors are becoming more discerning who they contract with, which will impact the skills shortage further and take the industry further away from delivering the UK’s ambitious infrastructure, housing and commercial needs.
  • Some business owners are winding up their medium sized businesses because it is no longer tenable to keep going.  Instead they are being driven to working cash in hand.
  • All workers on civil development sites have to be card holders of the construction skills certification scheme but some companies admitted that rules are bent when projects were running late and penalty clauses were imminent.  This will also impact quality, health and safety.
  • Companies borrow from the bank to shore up their cash flow but have to provide guarantees to the bank. If payment is not forthcoming then the bank will foreclose and the company will be forced to bankruptcy.

Bankruptcy

There were noticeable differences between generations and their approach to bankruptcy according to the accountants interviewed. 

Baby Boomer and Generation X business owners try to keep the companies afloat and put off filing for bankruptcy, often putting their own money into the business to try and keep it afloat.  They want to look after their workforce, but there was a feeling of shame to have to file for bankruptcy. In contrast the Millennials had no feeling of shame and were confident to move forward to the next project.

The Wellbeing Question

The general feedback was that of a set of business owners that are stressed, overwrought and lacking any reasonable recourse in an industry that seems to operate on practices that punishes the smaller business.

Business owners that are fighting to stave off bankruptcy are understandably some of the worst affected.  Business owners that choose to revert to the cash in hand model, the stress extends well beyond them to their family members.

There was a feeling of continuous anxiety related to financial uncertainty, with bills still needing to be paid both personally and within the business.  In one very extreme case workers were unpaid for several weeks. The reason cited by the company was a mix-up by the new payroll staff.

UK construction skilled workers are suffering financial difficulty as workers from Eastern Europe drive down wages.  This was also a source of stress for owners and workers, with companies often having to choose the cheaper worker to be competitive and win the business.

Modern man is faced with a prehistoric reaction to stress that enables an appropriate fight or flight response when faced with danger.  This response drains cognitive function and puts all resources towards fleeing or fighting.  Continuous anxiety and stress can lead to total burn out if not managed.

The construction industry statistics are bleak on the Wellbeing front.  Nearly a 5th of all long term absences are due to mental ill health. The industry also has the highest suicide rate of any profession. There were 1,419 suicides by those working in skilled construction and building trades from 2011 to 2015. Of these, 1,409 were men and 10 were women. Ten per cent of all suicides in the UK happen within the sector and workers are 6 times more likely to die from suicide than from a fall from height[4]. Injury on the job is also very common.

Something has to change!

The Light on the Horizon

The light on the horizon was hard to find and solutions to the problem not clear cut.  However there is hope.  The Construction Leadership Council is still driving towards positive change for 2025 and “fair payment terms” is part of that campaign.

Build UK, the leading representative organisation for the UK construction industry, with its partners and stakeholders are campaigning to end cash retention practices and are pushing for comprehensive government legislation.

They are also campaigning for an industry-led roadmap that will drive the cultural changes required to address the underlying issues of retention, while realising benefits for the industry, its clients and stakeholders.

Reputable debt collection agencies that have a lot of clients in construction advise that having regular and open communication channels with your customer and being persistent and timely about chasing payments can make a difference.  In addition, ensure the person responsible for chasing any debt is also someone that has the opportunity to build beneficial client relationships from day one.

Having robust contracts and debt collection procedures that are clear and concise can also aid collection when it is needed.

Whilst credit card payments attract a fee, the payment terms for businesses can mean a sub-contractor gets paid while the payee does not have to satisfy the bill immediately. It can be a way out of cash flow issues for both parties.  Payment now with a fee is better than payment much later.

Check the company thoroughly that you are about to enter a contract with.  Their payments rates might be listed in the Build UK Members’ Payment Performance.

Consider how you log and record issues.  Make sure you keep a snag list with updates on any subsequent actions and reviews by any parties.  Consider recording relevant phone calls.


[1] The focus of this paper is on companies that sub contract on large residential or civil sites providing different aspects of the construction supply chain. 

[2] In October Kash Ahmad advised “We estimate that in the construction sector alone, more than £2.8bn is written-off each year as customers fail to pay subcontractors”

[3] Source: Build UK Press release 24 January 2018

[4] Source:  Office for National Statistics