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Why is the Prompt Payment Code Failing Construction?

Why is the Prompt Payment Code Failing Construction?

According to the Federation of Master Builders (FMB), the construction industry is plagued by late payments.

In 2018, a Business, Energy and Industrial Strategy committee recommended that the Government introduce a tougher regime to address the issue of how larger companies treat smaller ones when it comes to late payments and long payment terms.

“The government’s Prompt Payment Code has already come under fire for not offering SMEs sufficient protection or guarantees of being paid on time,” explains Paul Daine of Premium Collections. “This is made worse in the construction sector, where poor practices are commonplace, unfortunately.”

 

Structural Issues

One reason why late payment is so acute in construction may be down to how the sector itself is structured.

“From the 1970s onwards, construction has tended to involve main contractors who, rather than employ direct labour of their own, use subcontractors.  What this has resulted in are supply chains that are often long, complex and prone to communications issues and strained relationships.”

“This gave companies fewer liabilities on their balance sheets, but now payments are having to pass through increasing numbers of people, often ending up in delays, misunderstandings and disputes.”

Another issue in construction payments is retention.

 

“Often contracts will allow for the client to withhold money if the work has not been carried out within an agreed period or not in an agreed or correct manner”

Paul Daine, Premium Collection

 

“This has meant that often relationships in construction are adversarial, and with outcomes taking a long time to be resolved.”

“There is also the issue that some contractors may be paying subcontractors late to improve their own cash flow.”

 

Industry Risks

Although late payment is a specific issue for companies and contractors, it is also a wider issue for the whole economy.

The construction sector employs around 10% of the UK’s workforce and contributes some 7% to GDP. There may be as many as 20% of all UK businesses that are construction-related.

“Where late payments lead to cash flow issues, this can send ripples of disruption through the sector, and also can affect those businesses who work with, or are dependent on, this sector.”

Under government rules, companies must submit data regarding payments, which at least offers visibility to prospective contractors.

 

Does the Prompt Payment Code Work?

“The government’s Prompt Payment Code has come under criticism for failing SMEs, and not just in the construction sector. There may not be an obvious solution to late payment, but businesses must look first to their own processes.”

This means ensuring they know as much about potential customers or clients as possible before agreeing to undertake any work.

 

“Make sure you carry out due diligence, especially now that larger companies must publish information about their payment terms, processes and performance, and make sure your own terms are clear, and in writing”

Paul Daine, Premium Collections

 

“The idea is to be more proactive than reactive, for firms to protect themselves by being systematic in how they administer their own credit management.”

And if these measures are unsuccessful, SMEs should consider seeking outside help, through the services of a professional collections agency.

“Commercial debt recovery should be a logical, procedural extension to the process of ensuring you get paid,” Paul concludes.

 

Premium Collections has developed a report with Business Aspects Magazine, Credit Management, Cash Flow and Getting Paid.

Discover more about the report or get your free copy, here.
Cash flow and getting paid