Despite all the other bad economic news out there, late payment remains one of the biggest threats faced by construction SMEs, writes BESA’s director of legal and commercial Debbie Petford.
Perfectly good businesses are being forced to the wall through cash flow problems despite being owed hundreds of thousands of pounds – often for years. It is one of the biggest – and least publicised – financial scandals and is being exacerbated by the current merciless economic conditions.
Small businesses spend 130 hours every year, at an average cost of £1,500, chasing payment, while incurring £180 million in debt interest charges – money that could otherwise be used for recruitment, investment, and growth at a time where the industry desperately needs both capacity and innovation to improve its productivity.
Many BESA members are sick and tired of acting as ‘bankers’ to firms further up the construction supply chain and dealing with the stress that comes with it. We pay a huge human price in anxiety, lost sleep, panic attacks, damaged family life – and it is no surprise that people involved with construction are four times more likely to commit suicide than any other profession.
The government is carrying out a consultation on this issue in yet another attempt to get bad payers to meet their obligations to their suppliers. It is crucial that the voice of our sector is heard because there is a real danger that the most important and meaningful measure could be left out – making this another missed opportunity to bring about real and lasting change.
The consultation, which runs until 28 April, will lead to improvements to the existing Reporting on Payment Practices and Performance Regulations that should make more information available to contractors to help them negotiate better payment terms and know which bad payers to avoid.
However, the government is currently missing a crucial element – the most crucial element:
Companies must be required to publish the amount they have paid not just the number of invoices. Simply reporting the number of invoices paid or where they have settled some small expense claims could make it look like they are improving their speed of payment, but in fact it is HOW MUCH they are paying that counts.
Five years on from the collapse of Carillion, many main contractors are still “marking their own homework” and there is a welcome proposal in the consultation to make individual directors responsible for the company meeting its fair payment pledges. This could also be a ‘game changer’ and BESA is pushing for that measure too.
Under the proposed changes, companies would be required to report the average number of days taken to make retention payments, after practical completion and the end of the contractual defects liability period. They would also have to report how many retention payments were paid in 30 days or fewer, between 31 and 60 days, and in 61 days or more.
The government would also require firms to publish the average value of the retentions they held as a percentage of the overall contract and which retentions were not paid in the agreed period and why.
But it is payment by value that is the best way to gauge how well a company is performing which is why we need BESA members to make their voices heard…and we have made responding to the consultation as easy as possible. You can simply copy and paste the responses below and then email them to: email@example.com by 28 April.
We are making this as user friendly as possible because we believe this is a major opportunity to get proper legislation that could – at long last – make effective and lasting change to the late payment culture that has undermined our industry for decades.
And don’t forget, if you need any legal or commercial advice on this or any other industry topic, you can login to your BESA Members’ Resource Area to access free guidance and support.
COPY AND PASTE THE FOLLOWING WORDING AND EMAIL TO firstname.lastname@example.org by Friday 28 April.
I am responding on behalf of my business which is an SME.
Question 1: Do you agree that the Regulations should be amended to extend their effect beyond 6 April 2024?
Yes – construction has the highest insolvency rate in UK commerce and it is getting higher.
The reports and data represent an opportunity to provide us with a single source of metrics for payment behaviour of those we work for to inform our commercial decisions. Removing this legislation would be detrimental to SMEs like ourselves who operate in UK construction where margins are low and risk is high.
Question 2: Do you agree that the Regulations should be amended so that a qualifying business is required to report the total value of payments due in the reporting period that have not been paid within agreed terms?
Giving SMEs metrics on the average percentage of payment made within 0-30, 30-60 and 60+ days does not give us a true picture of payment performance, unless we also know the value of payments being made within those timeframes.
With only the existing metric, real payment performance is obscured as large numbers of low value expenses paid instantly distort real supply chain payment performance. This defeats the purpose stated in the consultation of the reports.
If the data is to provide small business suppliers with better information so they can make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments, we require both metrics.
Otherwise, the reports, as the consultation states, will not remain effective and [will] encourage businesses to ‘game the system’.
Question 3: Do you agree that it should be a requirement for a reporting business to include their payment practices and performance reports in their directors’ report?
Yes, directors have certain statutory duties including s.172 of the Companies Act which require all directors to have regard (amongst other matters) to the likely consequences of any decisions in the long term and the need to foster the company's business relationships with suppliers, customers, and others, but they also have a duty to put the company’s best interests first.
If the payment practices and performance reports are part of the directors’ statements, this will go some way towards a more robust infrastructure behind ensuring the accuracy of those statements and underlying payment performance reports and data.
Question 3a: Do you agree that making it a requirement for a reporting business to include their payment practices and performance reports in their directors’ report is a sufficient additional requirement for a reporting business?
Making it a requirement for a reporting business to include their payment practices and performance reports in their directors’ report will be another step towards giving the regulations teeth.
However, we would question how, without spot checks and independent audits, the data or directors’ statements referencing their data and performance trends can be verified.
Whether a director has breached the duty under s,172 in making the statement, is a subjective test as to whether the director honestly believed that their act or omission was in the interests of the company. The issue is as to the director’s state of mind, and the standard of review by the courts is whether the decision was one that no reasonable director could have considered to be in the company’s best interest.
This is incredibly difficult and expensive to prove making the remedy solution of a putting the payment performance reports and practices in a director’s statement insufficient additional requirement.
Question 4: Do you agree that the Regulations should be amended to clarify payment dates used for reporting when supply chain finance is used?
Counting SCF payments within the payment performance of a payer should not count towards the payers’ payment performance.
Being paid under a SCF arrangement may require fees for being paid on time by the SCF provider. Further those payments may also require us to agree a to repayment (claw-back) arrangement where the payer does not pay the SCF provider.
SCF was meant to be a way of small businesses getting paid earlier, instead it is a way of large businesses introducing further liquidity into their own system, whilst ensuring their payment performance remains positive.
SCF therefore becomes another way of gaming the system.
We all know that putting clarifications like this in the statutory guidance for clarification means it does not have to be followed because it is only guidance which is persuasive, but not conclusive evidence in law.
Where a point is important it should become part of the Regulations themselves. The more important point which is in guidance, but needs to be transposed to the Regulations to avoid cheating is on the dates for measurement in qualifying construction contracts.
At present, the guidance clarifies that under construction, payment performance metrics should be measured from the date on which the payer is given notice of the amount due which under the Construction Act, is the application date. Whilst this remains guidance-only, it is open to being ignored and therefore abused - hidden delays can fall outside of the payment performance reports.
This requires urgent correction within the Regulations themselves.
Question 5: Do you agree that the Regulations should be amended to consider disputed invoices as a separate entity, to improve the accuracy and transparency of the reporting data?
Agree, subject to: a) reporting on the percentage and value of invoices which are disputed, and having to report on data on both the volume and value of payment performance on both undisputed and disputed invoices.
Otherwise, if you remove disputed invoices from the reports the system will simply allow payers to remove any delayed/late payments from their payment performance by classifying them as disputed.
The reports will then not remain effective and will encourage businesses to ‘game the system’. The reports won’t match the reality for small businesses.
Question 6: Do you agree that the Regulations should be amended so that payment practice and performance reports should include information on the standard retention payment terms in qualifying construction contracts?
Cash retentions for us, represent labour and materials already delivered and installed. They are often abused as the legal costs of recovery are not viable given the amounts involved.
Adding the standard retention payment terms to the reports would represent a significant metric to enable increased transparency and public scrutiny of large businesses’ payment practices and performance; and provide [us] with better information so [we] can make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments.
Question 7: Do you agree that the Regulations should be amended so that payment practice and performance reports should include statistical information on retention payments?
Question 8: How many hours does your business spend and which staff are required (please give an indication of hours by level of seniority) in order to comply with the Reporting on Payment Practices and Performance Regulations 2017?
Question 9: What does this cost your business in terms of pay for each level of seniority?
Question 10: What (if any) additional costs did your business incur (beyond staff pay) in complying with the Reporting on Payment Practices and Performance Regulations 2017?
Information on our own credit control personnel, technology, credit rating and external credit advice, costs is commercially sensitive.
Small businesses which dominate construction on average spend 130 hours each year, at an average cost of £1,500 per business, chasing payment, while incurring £180 million in debt interest charges – money that could otherwise be used for investment and growth at a time where the industry desperately needs both capacity and innovation.
The cost of late payment to us is that working capital tied up in bad or delayed debts from debtors restricts our investment in; expansion/growth, innovation/R&D, training/recruitment/skills, office, technology and equipment. This is compounded by payment practices in our industry that operate on a model where we are forced to deliver (and transfer ownership of) goods and materials to clients long before payment is made with the result that we bank-roll the clients’ construction process.
The human cost in our sector of late/abusive payment on SMEs is:
- 72% of those paid late experienced stress as a result of late/abusive payment, nearly 30% experience insomnia and 12% eating problems.
- Nearly 30% experienced depression and/or extreme anger and in 34% of cases this also led to anxiety and/or panic attacks.
- Construction workers were nearly four times more likely to take their own life compared with other sectors last year.
- 64% of late/abusive payments impact abilities to sleep and over half of cases saw late/abusive payment cause depression, anxiety and mental health issues.
- 40% of late/abusive payments put their relationships under negative pressure.
- 15% of cases saw late/abusive payment lead to their own struggles to pay rent/mortgages and over, 18% led to reductions on celebrations/presents, 20% to cancellation/delay of family holidays and nearly 30% of cases it led to reduced social activity.
- As a result of late/unfair payment, 59% of SMEs stopped or reduced paying themselves in order to mitigate the impact on their business.
- 25% of the time late/unfair payment leads to training cuts and struggles to pay business taxes, in over 20% of cases a lack of maintenance of office infrastructure, in 15% an inability to refurbish office premises, in 22% of cases this adversely impacted on creditor’s personal credit rating and, further, a refusal of credit/finance facilities in 10% of cases.
- In over 30% of cases late/abusive payment led to struggles to retain and/or recruit personnel and had a 22%negative impact on staff productivity.
- In 17% of cases late or abusive payment as takes and SME business to the brink of insolvency.
COPY AND PASTE THE WORDING ABOVE AND EMAIL TO email@example.com by Friday 28 April.
Together let’s fight for fairer business payment for all.