Uncertainties over Brexit are undoubtedly causing major issues for British businesses (particularly in terms of how and when they can move forwards with investment-driven projects). However, there is another pressing issue that, right now, is hugely problematic for companies – late payments.

Just take a look at the following statistics:

  • The UK’s late payment problem amounts to £16bn.
  • One in five businesses flag late payments as a challenge and this rises to 24% for SMEs. (ICAEW Business Confidence Monitor)
  • 92% of businesses admit to paying suppliers late (Bottomline)
  • 50,000 small firms go out of business because of late paying clients each year (FSB)
  • Small businesses in the UK are owed on average £6,142, mostly by larger firms not paying them for goods/ services on time. (FSB)

While  the late payment problem affects businesses across almost every industry, the construction sector is particularly vulnerable. This is thought to be due to frequently low margins, constrained cash flows and various other common practices in the industry.

Despite it being normal to have agreed payment terms before construction projects begin, industry research suggests that the average construction firm waits 107 days before it receives payment.

The consequences

When businesses encounter problems collecting late payments, the effects can be extremely damaging. Here’s just some of the potential consequences:

  • Damaged reputation (for not completing a contract or not providing a satisfactory service).
  • Inadequate funds leading to practices like cutting corners (e.g. relating to standards or the quality of work).
  • Loss of employees.
  • Disruption to the supply chains.
  • Restricted or even completely stalled growth.
  • The liquidation and dissolution of firms.

Worried looking manOn top of these economic damages, there is also a real human cost to business owners and top management. A recent survey run by the trade bodies ECA and BESA found that nine out of ten construction bosses are suffering mental health problems caused by late payment. The biggest problem is stress (80% are affected by this), but other commonly experienced issues include panic attacks, extreme anger, insomnia and depression. 10% even report having suicidal feelings.

What can you do about it?

To address the late payment problem, construction firms and subcontractors need to look carefully at how they resource the collection of payments in their business and put in place clear policies and procedures that work to both minimise the number of late payments in the first place and deal effectively with problems as/when they arise. Here’s some best practices:

  • Always seek to establish the client’s credit worthiness.
  • Agree on payment terms for each contract from the very beginning.
  • Make sure you fully understand the contract’s payment terms.
  • Ensure the job is priced accurately and be strict in negotiating the terms.
  • Verify whether the client has signed the Prompt Payment Code.
  • When payments become overdue, take action immediately.
  • When you experience late or non-paying clients and they become unresponsive to reminders, do not be afraid to take them to court.
  • Undertake regular reviews of your finances to ensure that you know exactly when payments should be coming in and when your expenses are due.

Don’t wait for problems to take hold!

It’s an unfortunate reality that late payments have become commonplace across businesses in the UK and this is especially so within the construction sector. Despite efforts to rectify this (for instance the standards and payment practices set out in the Prompt Payment Code), the situation does not seem to be improving.

Therefore, it’s down to contractors and subcontractors to make sure they fully understand the problem and the measures that can be taken to deal with it. We hope this week’s blog helps a little!


Image source: Freepik