In the battle between David and Goliath in the construction industry, time and again David loses out, with smaller businesses in the industry having to wait far too long to be paid by larger “Goliath” companies. This can have a severe, and sometimes fatal, impact on cash flow.
Late payment in the construction industry has been a burden for small businesses for far too long. The government has acknowledged that prompt payment can “make all the difference to small businesses” — often the difference between a company continuing to trade and folding.
It has been under pressure for a number of years to make payment under contracts fairer and more transparent. In December 2008 it launched the Prompt Payment Code (“the Code”).
The Code is a voluntary scheme for businesses to sign up to. So far, it has 1,909 signatories ranging from construction, engineering and transport and logistic firms to hospitality, healthcare and retail companies. Under the Code, signatories undertake to pay suppliers within a maximum of 60 days, with the aim of working towards a 30-day time frame.
In addition, the government is seeking to enact the requirement under section 3 of The Small Business, Enterprise and Employment Act 2015 (“the Act”) providing a statutory duty for large companies to report on their payment practices. This is due to come into force on 6 April 2017.
Under the Act a “Qualifying Company” will need to publish a) payment practices and policies relating to relevant “Qualifying Contracts” (which is a pretty broad definition) and b) the company’s performance by reference to those practices and policies.
This will include details as to its payment performance and will need to detail, as a percentage, how many invoices they paid (i) within 1-30 days (ii) within 31-60 days and (iii) after 61 days.
In addition to the processing and payment of invoices, other details will also need to be published, including the standard payment terms of the company and any which are not standard; comment on any disputes relating to the payment of invoices; and a statement as to whether the Qualifying Company’s payment practices and policies provide for the deduction of a sum from a Qualifying Contract.
Companies will be required to file their reports every six months, as opposed to quarterly, which was seen as too onerous under the initial reporting proposal. Some companies suggested annual reporting, but it was considered that this would not provide suppliers with timely accounts, potentially defeating the object of the regulations.
The first reporting period in a financial year will be six months from the first day of that financial year and the second reporting period is for the remainder of that financial year.
Although there is no definition of a “large” company under the Act, the minister of state for business, enterprise and energy has confirmed that there has been support for adopting the Companies Act 2006 definition of a large company.
This was mirrored in the draft regulations on the Reporting on Payment Practices and Performance Regulations 2017, published in December 2016. The draft regulations state that a “Qualifying Company” will be determined with reference to turnover, balance sheet and average number of employees.
A Qualifying Company will therefore have:
The regulations will apply to a company for every financial year in which it is a Qualifying Company, however, it cannot be a company in its first year of trading.
The draft regulations propose a strict sanction on companies that fail to publish a report, or produce a false statement, incurring a financial penalty. There is presently no comment as to the level or cap of these fines.
Results have shown that under the Prompt Payment Code, companies have reduced the number of days an invoice remains unpaid. This is a step forward in supporting smaller businesses, especially in construction, where cash flow is essential.
Once the new proposals are enforced under the Small Business, Enterprise and Employment Act in April, larger companies will need to comply, or risk being fined. The results will be publicly available and it could be embarrassing for large companies to reveal ongoing disputes or slack payment practices.
On the other hand, it presents an opportunity for these larger organisations to showcase how good they are in respect of payment, compared to their competitors in the market place, a chance to make them more attractive at tenders and to outside investors.
All in all, this must surely be a good thing for the construction industry. There will shortly be incentives that were not there before and it is hoped that this will lead to more efficiency in the payment process, cut out the excuses and lead to quicker payment for contractors and subcontractors alike.
This can only be a step in the right direction for smaller businesses in construction, aiding their cash flow – giving David more power against Goliath.
Mark James is a partner and construction lawyer at Coffin Mew