Joshua Stein reveals the payment performance of the UK’s largest contractors – and asks whether it’s too easy for firms to manipulate the system
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“If businesses or freelancers are owed a lot of money, their cashflow is affected. Unless they have a large amount of funds in the bank, they just can’t stay afloat.” Freelance construction project manager Nat Delfino speaks for many when she outlines the risks of not getting paid on time. The financial squeeze is on and these are tough economic times. Since late 2017 – as part of what the government said was action taken to protect smaller players – medium and large companies have been required by law to submit payment-practice reports to the government every six months showing how long they take to pay their invoices. Part of the stated benefit of the reports was that publicly showing how long companies take to pay would give small businesses the power to make informed decisions about who to trade with, negotiate fairer terms and challenge late payment.
Data from these reports indicates that payment times have improved slightly in recent years, but there is evidence that the system can be manipulated to make it seem like payment times are better than they are.
With the issue being make or break for many firms, Construction News investigates what the latest data shows, asks whether it can be trusted, and highlights its continuing importance to the supply chain.
Payment time
A CN analysis of the largest 100 contractors indicates payment times are getting better. Of those who published their latest data (see table below), the median time it takes to settle a payment is 35.5 days. This is an improvement on the 38 days it took when CN last crunched the data back in December 2021.
“It is not that anyone is dishonest, it’s that the rules on payment reporting only require you to report half the picture”
Rob Driscoll, Electrical Contractors’ Association
It is also an improvement on the median of 43 days taken in 2019, when CN first analysed the payment reports. However, it is still slower than the Prompt Payment Code’s 30-day target – regularly cited as Whitehall’s gold standard.
As well as time taken to pay, companies also have to state how many of their invoices are not paid to terms – i.e. they were paid but not within an agreed timeframe. In the latest set of data, a median of 17.5 per cent of invoices did not meet the standard. That is lower than the figure from last year, when 18.5 per cent were not paid to terms.
Larger firms paid up quicker than smaller ones, with those with a £1bn-plus turnover averaging a 28-day payment time in their latest reporting period. Those with a turnover of less than £200m made payments on average within 40 days. However, the smaller firms showed an average of only 10 per cent of their invoices not being paid to terms, while among the larger firms, the average was 15 per cent.
Financing work
Despite the improvement in payment times, late payment remains a burning issue for the construction industry.
Electrical Contractors’ Association (ECA) director of legal and business Rob Driscoll says the reported payment times do not always match the reality on the ground. “Some are saying payments are getting better, and that payment in construction is speeding up. The reality of industry insolvencies is contradicting this,” he says.
Latest available Insolvency Service statistics show that construction was the worst-hit sector for business insolvencies in 2022, with 4,143 failing in the period.
More recent data obtained by CN shows there were 15 more construction administrations in January 2023 – three higher than in the same month in 2022. Administrator reports have highlighted that small companies in particular are struggling with the impact of material price increases, labour shortages, inflation and skyrocketing energy prices. Add late payment into the mix and subcontractors’ stress levels increase even further.
Balance of power
Being at the top of the supply chain, tier one contractors and clients hold the balance of power when it comes to contracts. That leaves many smaller firms reluctant to raise issues with payment, for fear they could lose a key client.
In its response to last year’s consultation on the prompt payment reporting times, the Association of Accounting Technicians complained that the regulations were “a well-intentioned but wholly misguided and ineffective policy response to the multibillion-pound problem of late payments”.
It argued the “asymmetry of bargaining power, size and importance” largely renders the reporting irrelevant. “If a large company is the only option or forms the main bulk of a small company’s sales, then there is virtually no chance of the small supplier taking their business elsewhere because of an awareness of poor payment practices.”
The idea that better reporting could solve the issue is “far from credible”, it added.
The view is echoed by many in the industry. One south England-based consultant tells CN: “The problem is the balance of power in the relationship – there is always the potential that you cut off your nose to spite your face if you raise late payment.
“You raise it, they could always say, ‘we’ll look elsewhere for future work’. In some cases, you can’t afford to lose the work.”
Although the consultant says only a minority of clients are problematic, smaller companies have “accepted it as part of our working operations”. They add that challenging the matter legally is costly and could spell the end of important business relationships.
TOP five – average time to pay
- 15 days ISG
- 19 days Costain
- 20 days Amey
- 22 days Lendlease
- 23 days Ferrovial Agroman UK
The top-five firms to pay all have pretty good histories when it comes to paying on time. All of them beat the 30-day payment target this year, while four of the five also hit that milestone in the previous edition of the CN Payment 100. Three of the firms also successfully decreased the percentage of contracts they did not pay to terms.
Bottom five – average time to pay
- 72 days Colas
- 65 days Spie
- 63 days Briggs & Forrester
- 63 days Forth Holdings
- 59 days T Clarke
The good news is that no firm had an average of more than 100 days to pay invoices – last time some firms, including Spie, did take more than 100 days on average to pay. Only one of the five worst payers, Colas, is in the top 50 of the CN100, an indication that some tier two contractors have much work to do in improving their times.
System errors
Multiple commentators tell CN that the payment-reporting legislation, introduced in 2017, is open to massaging by contractors. Few dispute that payment measures passed in recent years – which include rules that firms have to pay 90 per cent of invoices within 30 days or face exclusion from public contracts – have had a positive impact.
But, as has been raised for several years, there are ways in which firms can seem to pay on time but not actually improve their practices overall. The reports state the number of invoices paid within 30 days. That leaves the system open to manipulation. As the number of invoices, and not the amount paid, is noted, there is no way to gauge their value. One invoice could be for a £350,000 construction job, another 20 could be for a box of pencils. In this way, some firms may be “crowding out” late big-ticket payments with prompt but insignificant payments. The ECA’s Driscoll says: “It is not that anyone is dishonest, it’s that the rules on payment reporting only require you to report half the picture. Hundreds or thousands of low-value, instantly paid expenses count equally alongside a single, 90-day £1m supply-chain payment.” Measuring the payments’ value would better show a firm’s payment performance, he adds.
Delfino agrees that the current system makes “no sense”. “This clearly could be used to massage compliance or lack of compliance with the code,” she says. CN has also heard of contractors asking for invoices to be resubmitted before they pay up, meaning that what was actually a late payment comes across as being within the regulations.
Meeting the criteria and the method behind the numbers
Firms that meet at least two of the following criteria in their last two accounting years are required by law to file a Payment Practice Report:
- Turnover of £36m and above.
- Gross assets of £18m and above.
- At least 250 employees.
Companies subject to the rules must report twice per financial year, with the first report covering the first six months and the second spanning the remainder of the financial year.
Data used in this edition was collected for companies that both submitted payment information and appeared in the latest CN100 ranking of the UK’s largest contractors. The most recent six-month filing (up to and including 5 January 2023) and the equivalent figures for the same period 12 months earlier were used to assess the progress of every
firm on the list.
Tough times
The consequences of late payment remain stark. “The bottom line is, it impacts on your growth,” Kevin McLoughlin, managing director at north London-based painting and decorating firm McLoughlin Group, tells CN. “In a standard job, the material cost is around 15 per cent, while all the rest is labour.”
“If you don’t get your payments on time, your cashflow suffers and guess what? You’re out of business”
Iain Cotgrave, project management consultant
Labour is paid on a weekly basis, so if a business gets paid late, financing the work is impossible.
“If we can’t get hold of that money, then we can’t finance any more work. It means that companies like ours are really struggling to survive,” McLoughlin adds.
The worst-case impact of not being paid on time is contractors having to stop trading. Iain Cotgrave, an independent project management consultant based in Winchester, Hampshire, says a lot of smaller firms do not “have much of a buffer in their accounts”. At one time companies could rely on banks to bail them out in the short term, he says, but with credit now harder to come by for builders, this can be problematic.
Cotgrave was formerly director of Hants-based leisure and education contractor Createability, which went under in 2020. The company, hit by the impact of lockdown on its principal areas of activity, also struggled when a client failed to pay a £1m bill. That unpaid bill helped push the firm out of business, he says.
“For a guy that turns over half-a-million quid or £200,000, the chances of getting any credit from the bank are pretty slim,” he says. “The knock-on effect is if you don’t get your payments on time, your cashflow suffers and guess what? You’re out of business.”
McLoughlin adds that “insane” delays to projects are pushing prices up, leading to arguments that mean payments are made later.
“Project values often go up, meaning you also end up debating contracts, which means when they do finally agree on prices, you’re way past when you should have been paid,” he says. The longer such a delay goes on, the more difficult it is for a small company.
Changing tack?
The loopholes in the reporting system aren’t sophisticated, and the solutions are relatively straightforward, the ECA’s Driscoll believes. “These aren’t complicated hacks,” he says. “The design of the payment-reporting system needs to be kept up to date to maintain its credible transformational value as the cornerstone of improving prompt payment behaviour.
“As with all great innovations, they become usurped if not kept up to date.”
For its part, the government has recently opened a consultation on proposals to update the reporting system, admitting in accompanying documents that the current system may “obscure” late payments and incentivise the prioritisation of low-value invoices.
It is now looking at forcing companies to report on the proportion of cash they withhold in the form of retentions, record disputed invoices and the value of payments.
In response to the issues raised by CN, a spokesperson said in an emailed statement that small businesses are an “integral part of both our economy and our communities”.
“Small businesses should not be forced to chase late payments, which can lead to cashflow problems, put their firms at risk, and prevent them from growing,” they added. “The small business commissioner’s Payment and Cash Flow Review, launched in December, will scrutinise existing payment practices, the Prompt Payment Code, and the measures in place to make sure small firms are not ripped off by their larger clients.”
The industry will be watching closely. Many firms’ futures depend on it.
CN are to be commended for producing the payment table of shame. The table does not however include Public Clients, who are of course the worse for late payment. Be interesting to compare Contractors late payment to that of public employers.
It looks like an improvement but these metrics are not figures that many supply chain members will recognise or experience, whether for the median time to pay invoices or for the % of invoices not paid to terms. Here is my explanation as to why this might be the case:
• First the time to pay metric is based on average payment days by number of invoices rather than weighted by value of invoice. So, the metric can be lowered by paying a large volume of exceedingly small invoices quickly whilst paying the large value invoices a lot more slowly. An easy way to do this is to include credit card transactions and the re-imbursement your own employees expense claims in the measurements.
• Secondly, disputed invoices are not included in the measurement, so anything under certified or subject to a payless will be excluded from the calculation. This will impact the % on invoices not paid to terms as, if they are disputed, the do not feature in the calculation.
• Thirdly, retention payments are also currently excluded from the calculations.
Mark please get in touch with me
R
Have sent you an email Rob