Cashflow is King. Yet getting paid is a perennial problem across all projects, sectors and countries. But do you know how bad it really is?
According to the IACCM 2015 Report Payment Terms: Do Large Companies Abuse their Power?:
- 51% companies find that negotiating payment terms is becoming more contentious
- 18% of large corporations take more than 90 days to pay
- 40% of smaller companies say they are being forced into onerous payment terms.
Unsurprisingly, the major factor in determining the negotiability of payment terms is commercial power (59% agreed).
Build UK collates data on the performance of large UK construction companies, which shows both great and alarming practices by its 62 members:
- You will wait (on average) between 13 and 84 days to be paid
- Your payments could be late as much as 64% of the time
- Your payments will be paid within 60 days (the maximum recommended) from as little as 29% of the time.
Many construction companies have signed up the Prompt Payment Code which requires them to pay 95% of their invoices within 60 days. This is being strictly enforced with companies such as Kier being suspended for failure to comply with the Code.
But good practice is not catching… when Network Rail announced that it was paying – and expecting its direct (tier 1) contractors to pay – within 28 days, one of its panel subcontractors (tier 2) simultaneously switched to 60 days!
Why does it matter?
Late payment terms often reflect the need to use suppliers and subcontractors as working capital in a business (known as trade capital) but this has serious adverse consequences:
- Suppliers may increase their costs to cover this gap and, if it continues, insist on payments in advance/securities, front-load payment schedules or avoid working with late payers
- Late payers may suffer immediate reputational damage (e.g. when Carillion’s payment terms were extended to 120 days) – we have a long memory for this sort of behaviour
- Small firms may have to cut innovation, training, capital investment and expansion
- The sector may start to include interest, shorter periods between payments, unconditional triggers for milestones, rights to suspend and terminate for non-payment.
The Constructing Excellence 2016 Payments Minefield Report highlighted that small businesses in construction incur £180m of debt interest charges annually. The Late Payments Bill seeks to introduce a statutory payment term of 30 days across all industries (which would bring UK construction payments in line with Ireland under its Construction Contracts Act 2013).
What should you do?
Take control of payments by setting your payment terms clearly in your contracts, negotiating those that won’t suit your business (and could push you into financial difficulties), and making sure that your client has all the information they need to smooth their own internal processes.
If you want to discuss what payment terms your contracts should include, and how to negotiate those being imposed on you, give me a call. I can help you get paid promptly for the value you provide.