Last edited 15 Feb 2018

Six steps to combat late payment

The latest research figures show that the construction industry continues to suffer from the problem of late payment. Figures from the Department for Business, Energy and Industrial Strategy show that UK businesses as a whole are owed around £26.8bn. Construction companies are hit the hardest by late payments, forced to wait 82 days for invoices to be paid and according to the recent Euler Hermes Quarterly Overdue Payments Report, late payments in the construction industry rose by 27% during 2015.

A recent Freedom of Information investigation by the Electrical Contractors’ Association (ECA) revealed that the majority of local authorities in England are breaching their legal duty to ensure that their supply chain is paid promptly. The ECA points out that this makes it harder for small businesses to thrive and grow and it has called on Government to impose penalties on those councils who flout the law. Fifty two per cent of the councils investigated have not yet built in a contractual requirement for payment to flow throughout the supply chain within 30 days, as required by law, and 28 per cent have said they have not and will not be building a contractual requirement in at all.

These late payment issues are exacerbated by the absence of collaboration and transparency in the construction supply chain. By their very nature, construction supply chains are hampered by the fact that every building is different, developed by a team of consultants, contractors and suppliers, which may never have worked together before and may never again. With margins often squeezed from the top down and late payment being the norm, transparency and the trust it builds has been lacking for decades in the construction industry.

It is unfortunate that there is an entrenched belief that openness leads to exploitation of margins; in reality the lack of it leads to greater costs, delays and uncertainties. Increased transparency should combat bid rigging and mitigate the risk of corruption, which is present in this country too, as the arrests of managers from a high profile housebuilding company in late 2016 have illustrated.

It is important that housebuilders and developers protect themselves as far as possible from the chance of late or non-payment and technology will help them to do this.

The ability to check the credit rating of potential project partners, main contractors and supply companies is vital. Construction companies can protect themselves further by getting invoices out on time, chasing up all late payments and consider including late payment fees on invoices.

Late payment remains a major issue in the construction industry, but with the help of technology, increased transparency and the enforcement of legislation, things can only get better.

Six steps to combat late payment:

  1. Check the credit risk of potential client

The ability to check the credit rating of potential project partners, main contractors and supply companies is really important. Unless you do a credit check, you just don’t know whether they’re capable of paying you. ‘Finance Checker’ is a feature available to TenderSpace users which produces Credit Risk Reports which allow a subscriber to determine the creditworthiness of your business partners in an instant.

2. Get invoices out on time

This is an obvious one, but clearly one of the biggest reasons for late payment. Yes, it is tough when you’re busy on site, but get invoices out on time, quickly and accurately.

3. Make time to chase late payment

You have to chase late payment, no matter how busy you are. If you use an online accounting service, you can set payment reminders for your clients. Remember, communication with the person who actually pays you (an accounts department or the householder) is important and people, rather than invoices, are harder to ignore. Using the Finance Checker you can also see if you are dealing with a “can’t pay” or “won’t pay” client or supplier.

4. Put effort into your invoice design

Make sure your invoices are professional and well designed, containing all the information your clients’ finance departments require, such as Purchase Order numbers. This will help to ensure prompt payment.

5. Late payment fees

If your invoice clearly states payment terms, but a client has not paid them, you could consider a late payment fee. This could be contentious so use it wisely.

6. Shorter payment terms

Some clients want your work as quickly as possible, so why not explain therefore that payment terms for certain work are shorter than a traditional 30 days. This could work for emergency work or smaller jobs needed more urgently.