Why it pays to pay on time

6 January 2020 | By Neil Gerrard

Since Carillion’s collapse, payment terms have come sharply into focus. Neil Gerrard examines the efforts being made to speed up payment in the industry and how the best-paying tier 1 contractors benefit from their policies.

“No man’s credit is as good as his money.” That was the saying attributed to American 20th century philosopher John Dewey, although it’s just as likely to elicit a weary nod of agreement from most 21st century construction firm bosses as they await yet another tardy payment.

Late payment has been a feature of construction for as long as many in the industry care to remember. But the issue in a sector where margins are notoriously tight and cashflow consistently difficult to manage amounts to far more than a simple inconvenience. Often, unexpectedly late remittances can push a business to the brink.

There have, of course, been efforts to address the situation, including the Prompt Payment Code (PPC), introduced by the government in 2008 to limited effect.

But could the collapse of Carillion, which once again exposed the extent to which payments through the supply chain were being delayed, have finally helped shift the dial?

The Prompt Payment Code

The Prompt Payment Code, run by the Chartered Institute of Credit Management on behalf of the Department for Business, Energy and Industrial Strategy (BEIS), requires signatories to uphold best practice for payment standards, including a commitment to pay 95% of all suppliers within 60 days. Since 2019, it has been naming the companies it has suspended, or in some cases removed completely from the Code. There are hundreds of signatories to the Code within construction.

Major firms currently signed up include: BAM Construction; Bouygues; Costain; Dragados; Galliford Try; Interserve Construction; ISG; Kier Construction; Kier Facility Services; Kier Services; Laing O’Rourke; Mace; Morgan Sindall; Sir Robert McAlpine; Skanska; Vinci; Wates; Willmott Dixon

Companies currently suspended from the Code include: Balfour Beatty; Ferrovial Agroman; Kier Integrated Services; Kier Infrastructure and Overseas; Kier Highways; McNicholas Construction Services; Persimmon

Removed completely: John Sisk & Son

(At 6 December 2019)

Image: Carillion’s collapse turned the spotlight on slow payment

Despite holding billions of pounds worth of public contracts, Carillion was a notoriously slow payer, often taking up to 120 days to part with its cash. Suppliers were estimated to have been left out of pocket to the tune of £2bn.

Since then, in July 2018, Build UK announced that it would publish information on the payment performance of its contractor members every six months. Meanwhile, the PPC appears to have sharpened its teeth, removing or suspending a total of 17 companies during the first quarter of 2019.

Big names including Balfour Beatty, Costain, Galliford Try, Interserve, Kier Construction, and Laing O’Rourke were suspended (although Costain, Interserve, Kier Construction and Laing O’Rourke have since been reinstated). 

Prompt payment benefits

Naming and shaming contractors into improving the speed at which they pay seems to have had some effect, with several now making efforts to sharpen up. The latest figures from Build UK showed that the average time to pay has improved by five days among its 40 member companies.

But if they fear the stick, then contractors should also not forget the carrot when it comes to improving payment culture. Rather than simply feeling pressure to change, some of the industry’s best payers see clear benefits in doing so.

Among them is Beard, which regards good payment as key to timely and fault-free delivery of its projects, as Mike Hedges, a director at the firm, explains: “We are a business who values our suppliers and puts a priority on developing long-term relationships, which are based on mutual trust.” Currently, the firm’s average payment time is just 27 days.

At an average of 31 days, Willmott Dixon is one of Build UK’s quickest members when it comes to paying invoices. Although as chief financial officer Graham Dundas explains, prompt payment has always been important at the firm. “It is always something that has been a core part of our values and culture – that we work closely with our supply chain, we treat them fairly, we have fair payment terms and we stick to them,” he says.

Dennis Hone, chief financial officer at Mace, which takes an average of 30 days to pay, agrees. “Paying our supply chain partners promptly is vital for their cash flow, particularly as many of them are small or medium-sized businesses. The whole sector – from contractors and consultants to clients – must recognise that the projects we deliver depend on the financial viability of the suppliers we work with,” he says.

“It is fundamental for any business that they have a predictable cashflow and that they can rely on being paid in accordance with the terms they have agreed.”

That’s not to say that there aren’t challenges though. Paul Hamer, chief executive of Sir Robert McAlpine, which takes an average of 34 days to pay, warns that Build UK’s league table, while somewhat helpful, is nonetheless a “fairly blunt metric”.

Should the government do more?

Despite the fact that the government has already set out its aspiration for companies within its supply chain to pay within 30 days, the reality can be somewhat different, as Graham Dundas (below) points out.

“Those kinds of targets are already in place in terms of centrally procured government contracts but it is ironic that some of our worst payers are central government departments. I don’t think there is a problem out there in terms of targets and expectations but that doesn’t mean they are always met,” he says.