Three Tips to Avoid Late Payments in Construction

late payments

Late payments plague the construction industries. Lynne Darcey Quigley, CEO, and founder of cloud-based credit-management platform Know-it, discusses why this is the case and what businesses can do about it.

LATE PAYMENTS impact everyone. A survey from Penny Freedom showed that two thirds of the six million SMEs in the UK have at least one late payment on their books, with an average value of £15,370.50,000. However, due to the number of actors, particularly small businesses, in the construction supply chain, it is this industry that is left most at risk.

Since the collapse of Carillion in 2018, there has been a renewed focus on late payments in the construction sector. Although some changes have been introduced in recent years, such as the introduction of the Prompt Payment Code (PPC), the problems persist. Indeed, it has been worsened tenfold by the pandemic and the subsequent legislation aimed at helping companies stay afloat.

The Scale of the Problem

According to 2021’s ‘The Real Cost of Late Payments’ study by Juno, 68% of UK businesses are regularly paid late. The main reasons for this are:

  • 31% due to decisions by the paying party to delay payment
  • 27% due to cash flow issues
  • 26% due to a lack of organisation or simply forgetting
  • 21% due to messy internal processes.

Perhaps most worryingly, it is small businesses, those with 10-49 employees, affected the most – as 83% are paid late most of the time and have an average of 7.5 invoices outstanding at any one time.

Most Affected

According to the Juno report, construction is not in the top five industries most affected by late payments. With 72% of businesses in this space experiencing this common business problem, only service industries like PR/marketing and law get paid late more often.

However, what makes the construction sector so vulnerable is not just the prevalence of late payments but the fact that such a high percentage of construction businesses are micro-businesses and SMEs. The construction sector accounts for 20% of all SMEs in the UK, according to Bizdaq. This generally means less capital to bear the brunt of cash flow bottlenecks.

Furthermore, there are many actors in the supply chain, from global timber producers to government contractors, to the one man-in-a-van enterprise. Construction, due to the inherent weather-dependent nature of much of the work, its supply chain and plant, has near-infinite opportunities for disruption.

We can conclude three clear facts from this information. Firstly, as stated, small businesses are the ones most at risk from late payments. Secondly, it is not all directly down to the state of the economy and the pandemic. Disorganisation and poor business practices have a significant impact – and the cure for this lies with technology and digital solutions.

Avoiding Late Payment

  1. Pay on Time

It may seem obvious – but if you pay on time, that’s one more application for payment settled on time, which has a knock on effect through the supply chain. Reputations stay intact, brands strong, and business buoyant.

  1. Know Your Customer

Not all businesses neglect their duties and delay payments, and not all who have paid late do it on purpose or do it consistently. Understanding the difference between these can be vital to choosing reliable partners, customers, and clients. Background credit checks can help.

  1. Automate and Digitise

Technology is your friend – as mentioned above, Juno found that almost half of late payments were due to organisational issues – disorganised processes, busy accountants, or poor paperwork submitted as an invoice.

Digital tools and new technologies streamline admin tasks. They can automate your payments and digitise your receipts and your invoices. Cloud-based tools can help all employees stay on the same page. This can translate to improvements in productivity, and therefore growth. The ‘Springboard to Recovery’ survey by NatWest shows that a more tech-savvy mindset often defines the best performing businesses – because technology snowballs, and the more you use it, the easier it is to use, and the greater the benefits.

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