Payment delays could choke recovery, warns agency

Payment terms in construction in Q3 are still longer than the all-economy average, despite the overall trading upturn, putting the sector at the top of the table for risk of future insolvencies.

A study by  B2B credit reference agency Red Flag Alert found that in Q3, construction suppliers were on average being paid 16 days later than the terms in their contracts, while businesses as a whole are being paid 15 days beyond terms.

This represents an improvement on Q2, where average payments were 18 days beyond terms. But it shows that many Tier 2 and 3 subcontractors are still at risk of insolvency, despite the fact that their forward order books are looking healthier.

Red Flag Alert also says there are more “zombie” companies that are trading close to insolvency in Construction and Utilities than any other sector, including the General Retail category. Typically, these zombie companies are paying the interest on their debts, rather than the debts themselves.

Mark Halstead, partner at Red Flag Alert, commented: “Everyone is looking to construction to take us into substantive growth, but a lot of companies out there just don’t have the financial strength. They’re stretching themselves really thin, and could easily get into an over-trading situation. If the big players don’t start paying on time and quickly, they will be putting these businesses under a high level of stress.”

Red Flag Alert’s evidence of ongoing payment stress in the industry comes in the weeks prior to the launch of a new government-backed Supply Chain Charter. But it will be launched into an industry where subcontractors and advisers complain that main contractors have an ever-expanding repertoire of ways to pay late or underpay.

Main contractors’ methods of minimising their outgoings allegedly include:

• levying a 2.5% or higher charge on the subcontractor for “early payment” – then paying at the normal time or late
• asking for a “rebate” or discount for early payment
• deducting 10% from submitted invoices without a specified reason
• simply ignoring contractual requirements to issue Pay Less notices, or dated payment notices. 
• after a subcontractor has completed a number of jobs for a main contractor, asking for 10% “cash-back” as a thank you
• extending retention periods to 18 months

One Tier 3 subcontractor told CM that it had stopped working for two well-known national contractors and a major regional contractor due to persistent underpayment problems.

“We do chase to get paid, as far as we can without being sent to Coventry. In one case [of an arbitrary 10% reduction] I chased the matter up to the directors and was told they couldn’t overrule the senior surveyor. Often they don’t really give a reason for the deductions. 

“I’m not optimistic about the Supply Chain Charter, they seem to make matters worse. Main contractors signed up to the Prompt Payment Code, then we saw them extending payment terms. In some of these [Tier 1] contractors no one takes any notice of the legal requirements, the culture is so extensive it’s hard for any charter to get a focus on it.”

Peter Gracia FCIOB, whose firm Gracia Consult advises contractors on legal and payment issues, said: “[Underpayment] has always been going on, but people do it in different ways now to get round the mechanisms in the Construction Act.

“It used to be, in old versions of the JCT, that a rebate for early payment was part of a normal contract. Then they brought in legislation for swift payment, and everyone was supposed to get rid of rebates but lots of main contractors still have that element built in.”

Commenting on the forthcoming Supply Chain Charter, he said: “Governments, whether the Welsh government or the national government, are fairly naive, they continuously set up initiatives that get fairly good noises coming back and then think things are going well. But they don’t really see how difficult it is at the coal face. I’d be surprised if the new Supply Chain Charter makes things any better.”