03rd March 2014
Early payment schemes, late payment and the construction industry in 2014
Are early payment schemes a great solution to the late payment problem in the construction industry, or are they unfair?
The construction industry has been growing significantly in the past couple of years. While it hasn’t quite recovered from the huge impact of the recession, growth is strong and there are encouraging signs that this will continue. That being said, there’s one worrying factor that continues to hold the industry back, and everyone working in construction and the supply chain will know it well: late payment. In January, we learnt that the average payment time had fallen from 90 days to 85 days – still hardly what we’d call prompt payment, whilst a more recent survey suggested that the problem was failing to improve any further. Early payment schemes allow subcontractors, suppliers and other construction industry employees to get their hands on the money they’re owed much more swiftly than they might normally – but at a cost. Will 2014 be the year that we solve the late payment problem?
Are early payment schemes the solution?
Various suppliers, companies and local councils have been implementing early payment schemes. These schemes ensure the swift, prompt payment of subcontractors and suppliers if a nominal fee is paid or the buyer enjoys a pre-negotiated discount on the services or products supplied. Buyers benefit from reduced costs and less fraught relationships with suppliers. Suppliers benefit from reduced cash flow problems, less time spent chasing payments and the ability to pay their own debts and invoices more quickly.
Early payment schemes have been condemned by some as a 'cancer' on the industry – why should subcontractors receive less for their services simply because they want to receive the funds they are entitled to on time? Furthermore, the mere existence of these schemes seems to validate the late payment culture that exists in the construction industry. For contractors, the choice is now either late payment, or reduced payment.
Access for smaller contractors
One change that we expect to see this year is early payment schemes becoming increasingly available for small companies to use. In the past, they had been restricted to larger companies, but we’ve learnt recently that more early payment schemes will be available for medium-sized companies to use (with size based on annual turnover). As more and more players in the industry start to see the savings they could make by using early payment schemes, we expect smaller contractors and firms to be allowed to use them, too.
The Prompt Payment Code: ineffective?
The government’s previous attempt to get to the heart of the late payment problem in the construction industry was the Prompt Payment Code, which aimed to help smaller suppliers and contractors be paid promptly by larger firms with more power and influence. 1,559 companies have signed up to the PPC since it was established in late 2008. The code asks that its signatories honour the contracts they sign with their suppliers, and do not attempt to change any terms at a later date. Business leaders have recently said that the PPC was ineffective – some signatories are still trying to extend payment periods to as long as 120 days, rather than the 60 days outlined in the relevant European directive. It remains to be seen whether the PPC will gain any credibility during 2014.
Late payment summit
Contractors have challenged the government to hold a late payment summit to name and shame the worst offenders. The National Specialist Contractors Council says that the industry can change, but it just needs clear direction – and sanctions in place for the worst late payment culprits.
Changing the culture
Ultimately, the whole culture of the construction industry must change if we are to see an end to late payment. Currently, the big names are able to push smaller firms and contractors around, withholding rightful payments until it suits them. This continues to hold back the growth of small names in the industry, as many firms are unable to invest in new machinery or take on new staff because cashflow difficulties are such a frequent problem. It remains to be seen whether the government will listen to reason or instead continue to let larger firms get away with charging subcontractors and suppliers to get hold of their payments in reasonable time.
Here at Integrity Software we can’t solve all your late payment difficulties, but our construction accounting software can reduce the time you have to spend dealing with paperwork and your accounts, meaning that you’re able to dedicate more time to chasing up the worst late payment offenders.
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Nucleus Commercial Finance has revealed that it will be making early payment schemes available to medium-sized contractors. Is this a good thing or a bad thing for the construction industry?