Are late payment practices in construction too much for suppliers to bear?

Debt collection agencies are usually associated with the murkier side of the economy. It’s not the kind of recourse one would expect subcontractors to resort to when dealing with stock market quoted companies. But Kevin McLoughlin, founder of painting and decorating supplier K&M McLoughlin, says it has become standard practice at his firm to use debt collection agencies to deal with late and retained payments by the tier one contractors that he deals with. 

Although his company has a member of staff dedicated to chasing late payments – a luxury he points out that many of his peers in the supply chain cannot afford – he says the problem has become so big that he has brought in the debt collectors. The agencies’ 10% commission is usually covered by the interest on repaid debts, he says. “It’s better to hand it over to a company so we can concentrate on positive things.”

Construction’s late payment dirty secret has had a thorough airing over recent weeks amid the fallout from the collapse of Carillion, which went bust owing huge sums to its myriad suppliers. Their ranks include McLoughlin, although he is in a much better situation than Vaughan Engineering, which went bust itself last month, blaming the £650,000 it was owed by Carillion. 

Carillion may have earned a reputation as the industry’s most notorious poor payer, stretching its payment contract terms to 120 days in the year before its collapse, but there is little doubt that what was until recently the UK’s second biggest contractor was far from alone in its laggardly payment practices. 

Last week the Cabinet Office announced plans to ban companies with poor payment practices from major government projects, in what has been interpreted by trade bodies as a welcome response to the financial pain being felt by Carillion’s suppliers and others. While we are learning more this year about main contractor average payment times thanks to new payment data being established, pressure is also mounting in parliament to protect retention payments and elsewhere there are calls for the complete abolition of cash retentions.

Has Carillion’s collapse finally triggered reform?

“We have suffered terribly at the hands of main contractors, who perform badly on procurement and [on]retention”

Bola Abisogun, FMB

Duty to report

New rules forcing large companies to be transparent about payments is beginning to shed light on the extent of the issue. The so-called “duty to report” rules will apply to all companies with an annual turnover of more than £36m. They will have to report the nature of their payment terms and the proportion of bills they pay within 30, 60 and 61 days or more. The requirement is gradually kicking in throughout the course of this year, with companies having to publish the payment data within seven months of their first annual results after April 2017. 

The first tranche of data has already been uploaded, mainly consisting of those companies with a year ending in June. Among construction’s big hitters, only a handful have yet had to post the data. The biggest so far is Kier Construction, which records an average payment period of 59 days. Only 32% of its invoices were processed within the standard period of 30 days. A slightly higher proportion (34%) were paid after 60 days. 

Galliford Try Building Ltd’s average payment time was 49 days. The proportion of invoices paid within 30 days, 60 days, and over, were 39%, 34% and 27% respectively. Lendlease’s construction arm took 38 days to pay on average, with nearly half of invoices (46%) processed within 30 days and just 13% taking more than 60 days. McLaren Construction Ltd took an average of 46 days to pay, with 39% of payments processed within 30 days. 

Among specialist contractors, logistics supplier Wilson James took 50 days to pay on average, with two-thirds of payments (67%) processed 31-60 days after submission. McNicholas Construction Services, the utility and transport specialist bought by Kier last year, reported an average payment time of 81 days, with only 4% of invoices settled within 30 days.

A fuller picture of the industry’s payment practices will appear in July, by which point those companies using the calendar year as their financial reporting period must submit a report.

Having recently established an integrated administration centre, Kier is confident that its payment picture will have improved by July, when it next updates its figures. A spokesperson says: “Our payment terms and timing of payments to our supply chain partners remains a very important area of focus and a responsibility we take very seriously. We are actively working to drive through further improvement.”

A Galliford Try spokesperson says that across the company’s entities, the average is a slightly lower 42 days, adding: “Long payment terms are an issue that the sector as a whole continues to grapple with. Galliford Try maintains excellent collaborative relationships across our supply chain and we are committed to fair and transparent payment processes.”

And Mark Abraham, chief financial officer at Wilson James, says the company’s reported figure reflects its policy that all payments are made within 30 days of the end of the month in which an invoice is submitted. But he adds that while the company complies with the Prompt Payment Code’s 60-day target, it will be working to improve the time it takes to process invoices. 

He says: “In order to further improve our performance measured by these reporting requirements, Wilson James also implemented an internal policy change in March 2018 to reduce payment times further. We anticipate our future reported averages to reflect these changes.”

Bola Abisogun, chairman of the Federation of Master Builders (FMB) procurement group, says it is common to have problems extracting payment from certain major contractors – which he does not name specifically – with which his firm Urbanis has worked on public contracts. “We have suffered terribly at the hands of main contractors, who perform badly on procurement and almost as badly when it comes to retention.” 

“In a digital, more offsite manufacturing world, the idea of adhering to a 20th-century procurement approach doesn’t scan”

Alasdair Reisner, CECA

Greater transparency

Some firms appear to be getting their act together, says Alasdair Reisner, chief executive of the Civil Engineering Contractors Association (CECA). “They see that paying the supply chain on time confers benefits because they get the best suppliers.” 

Rob Driscoll, director of legal and commercial at the Building Engineering Services Association (BESA), highlights Skanska as an example of a company that is seeking to get ahead of any potential legislative crackdown on poor payments practice. “They are trying to do the right thing and realising that a quality supply chain is more useful to them than the manipulation of cash flow.” 

And Driscoll says Balfour Beatty has set up an extranet portal so that suppliers can see what stage their payments are at. “This transparency of where money is coming from is worth more than anything,” he says. 

But transparency is only valuable up to a point, cautions Andrew Dixon, head of policy at the FMB. For starters, the reporting requirements do not apply to many foreign-owned businesses working in the UK market, he points out. And there are deeper cultural issues within the industry that need to be remedied. Ultimately poor payment practices come from imbalances of power in the market, he argues, adding: “Measures to improve transparency are not sufficient.” 

Research carried out for the Department of Business, Energy and Industrial Strategy by the consultancy Pye Tait shows that tier two and three contractors have to wait a lot longer to receive retentions from the top of the supply chain than those same companies have to wait before they pocket retained cash from clients. These problems are especially acute for building services contractors, which will have a large chunk of their turnover tied up in plant, says BESA’s Driscoll. Estimating that 40%-60% of the cost of larger projects can be swallowed up by the cost of supplying and installing mechanical and engineering equipment, he says: “It’s a very fragile place to be, especially when the entire industry is running on 3% to 0% margins.”

Tackling the problem

Pressure is therefore growing on the industry to reform its payment practices. The government is expected to report within the next few weeks on the results of a consultation on retentions launched last November. And the chancellor, Philip Hammond, signalled fresh moves to tackle late payment across the economy in last month’s Spring Statement. Meanwhile, in the government’s package of measures to level the playing field for small firms – which include a proposed ban on public sector contracts for poor payers – the government has shown that in the wake of Carillion its patience with the industry on payments is running thin. Rudi Klein, chief executive of the Specialist Engineering Contractors’ (SEC) Group, says: “The government takes the view that this is not acceptable any more.” 

In a nod to the Carillion’s collapse, a spokesperson for the Federation of Small Businesses agrees: “The government don’t want to have this mess again.” Driscoll is optimistic that the government will address payment practices in the soon-to-be published construction sector deal, when the government could use the prospect of support for the industry as leverage to secure action on payment practices.

Meanwhile, pressure for reform is growing in parliament. Backbench MP Peter Aldous, who was a surveyor before he won the Waveney constituency for the Conservatives in the 2010 general election, has introduced a 10-minute-rule bill to set up a retentions deposit scheme. Under this, retentions would be lodged in an independently administered account, like the deposits of tenants in private rented homes. The bill has so far attracted the support of 100 MPs and a host of trade bodies. The FMB’s Dixon says the bill is a “good first step”, which may ultimately result in retentions withering on the vine. “If they [retentions] are serving a function as some kind of surety mechanism that will not happen. If they are just serving a cash function there is no point to them and they might die out.”

The end of retentions?

Klein believes the government is receptive to making project bank accounts mandatory for all public sector contracts. But such arrangements don’t go far enough for many. Representative body Build UK has drawn up plans to phase out retentions entirely by 2023. Under a road map that the umbrella body expects its members to implement, retentions would be capped from 2019 at 1.5% of the value of contracts worth more than £50,000. This would fall to 1% of contracts with a minimum value of £100,000 in 2021, before disappearing altogether two years later. 

CECA’s Reisner backs Build UK’s move to scrap retentions. He says: “We don’t think the Aldous bill is ambitious enough. There is no argument for retentions and we should just get rid of them. It’s a halfway house that could just create a new bureaucracy.” He argues that retentions are a hangover from an era of cowboy outfits that the industry should be aiming to leave behind. 

“We’re moving into world of much longer relationships with suppliers working strategically with customers,” Reisner says. “Get rid of retentions and it’s suddenly much more important to work with suppliers that want to deliver a quality workload. You want to work with someone who wants to come back. In a digital, more offsite manufacturing world, the idea of adhering to a 20th-century procurement approach doesn’t scan.” 

The Kier spokesperson expresses support for wholesale abolition of retentions. “We would welcome a move to eradicate retentions as they are a contributing factor in the challenge to shorten industry payment terms.”

But SEC Group’s Klein cautions that a wholesale ban would be hard to implement. “If you ban retentions, you have to ensure wording is wide enough to include all possibilities to catch those who are trying to avoid the legislation.”

And the public sector, collectively the biggest client in the land, has a self-interested stake in preserving the use of retentions. Dixon points out that compliance with the 30-day payment rule for public contracts, which was introduced in 2015, has not been as widespread as it should be. “The government needs to look at how that is being implemented in practice,” he says, adding that fixing payments is part of a bigger picture and if contractors from all tiers are making decent margins, many of these problems will go away. 

McLoughlin of K&M McLoughlin says payment problems are one of the chief reasons why he consciously seeks to cut out the middle man by working directly with clients, who now account for around 60% of his company’s workload. Abisogun is so fed up with late payments that he is considering an even more radical move by relocating his construction management company out of the UK to the US. There, he says, the business environment is much friendlier for smaller suppliers. “This market is too inefficient, too unproductive and too adversarial and I know there are better markets across the world. The UK is still very much an old boys’ club, where big means better.”

It looks like the government still has its work cut out persuading his and other smaller construction businesses that it is worth keeping faith with the industry.