Payment and construction: “we never get paid what we asked for – that’s just the way of our world”

Last month, Construction News conducted a survey on the thorniest of industry issues: late payment.

It is by far the most common reason why construction companies go to the wall and has been a massive problem for decades. However, some 35 per cent of survey respondents said they thought the situation had actually worsened in recent years, compared with 23 per cent who thought it had improved.

For the panel of industry experts who gathered online at the end of November to debate late payment, the statistics were disturbing. However, those attending the event, which was sponsored by Oracle Construction and Engineering, were also keen to stress that it is a multifaceted problem and one for which there are no simple solutions.

So why is late payment such a tricky issue to resolve? And what can be done about it?

An industry-wide problem

It is tempting to think that late payment is a problem that resides solely with main contractors – if they would only get their house in order, the issue would be resolved.

However, it is clear that the situation is more complicated than that. For instance, Keltbray purchase ledger manager Lisa Woodcock said that she had been shocked at the poor practice among many suppliers when she joined the company.

“One of the things that really, really surprised me was how many of our suppliers, including our main volume suppliers, don’t actually adhere to any processes,” she said. “A lot of the issues that relate to late payment actually originate because orders are accepted and delivered without a valid PO [purchase order] number.”

She added: “Keltbray needs to take some responsibility for that because I know that sites bypass process, don’t go through the supply chain, don’t go through procurement. They go direct to the supplier and order £10,000 worth of goods. The supplier accepts that order. The invoice comes in and nobody’s got any visibility on it.”

However, Woodcock was at pains to stress that, in many instances, late payment is due to factors beyond her control and therefore can distort the figures when it comes to the company’s payment-practice reporting. “I’ve had major suppliers forget to invoice us at times,” she said. “My frustration is that, at Keltbray, the values are very much that suppliers and subcontractors must be paid and the cash is always available to pay people.

“But sometimes we can’t do that because processes have been bypassed – and that can reflect badly if you look at the actual statistics.”

Michael J Lonsdale commercial director Stuart Talbot commented that he had once received an invoice three years late. Woodcock nodded.

“When it comes to services invoices, where you don’t necessarily have any documentation to match it up, how do we know that we received that service three years ago?” she asked rhetorically. “The person that placed the order could have moved on. We need to make sure that we manage our cashflow too.”

Steve Cooper, vice president of Europe at Oracle Construction and Engineering, noted that cloud technology could solve these sorts of challenges.

“It starts with enabling collaborative processes across project participants,” he said. “With that comes the visibility, efficiency and control that everyone needs to make sure payments are made properly and on time. The industry can do that today.”

From a client’s perspective, U+I development director Mark Richardson said that people often don’t appreciate the restrictions that developers face in drawing down money from the banks in the first place, which can cause delays in getting money to main contractors.

“Until I went client-side, I didn’t really understand a great deal about how projects are funded,” he said, explaining that the banks have strict rules on when and how funding can be drawn down.

“You’re only allowed 13 drawdowns a year,” Richardson continued. “So that’s one drawdown per month and then you’re allowed an extra one just in case there’s an emergency. It’s really strict. If we’ve missed the date, even by a day, we end up going from the 30 days to 60 days [payment term]. So that ends up with us having to fund what often can be many millions in order to honour our payment and we haven’t received the money from the bank.”

When and how much

However, when most people think about the problem of late payment in construction, they are thinking about subcontractors. And it is clear that this remains a serious issue. “We have someone dedicated to, and responsible for, chasing the cash in from our clients,” Talbot said.

“That’s pretty much her full-time position, chasing different clients and making sure that money comes in. Obviously, we’re fortunate enough that, with a lot of the relationships we’ve got with our clients, the money does come in. But there are those random ones where a lot of her time is wasted. She’s really reliant on the project surveyors to go and use their contacts to do the same thing as well.”

Another issue that is particularly relevant to subcontractors isn’t so much to do with when a company is paid, but how much. FK Group managing director Paul Bentley said that sometimes he only knows how much of what has been invoiced will be paid a few days before the money hits his company’s account when he receives a notice of payment.

“At Keltbray, the values are very much that suppliers and subcontractors must be paid and the cash is always available to pay people”

Lisa Woodcock, Keltbray

“We obviously make a valuation at month-end following the processes, but we won’t know what we’re actually going to get until maybe five days before that becomes due,” Bentley said. “And obviously, with how the mechanism of valuations work, we never really get paid what we asked for. But that’s just the way of our world isn’t it?”

Envelope specialist FK Group then has its own subcontractors and suppliers to pay, which are on different payment terms depending on the type of organisation. Clearly, that makes managing cashflow difficult, to say the least.

“We have a multitude of suppliers that we have to pay,” Bentley said. “We know we have a whole load of payment terms that we have to manage within the organisation. It takes a lot of time and resource.”

‘Not just the right thing to do’

According to Talbot, even with such uncertainties, it is still worth trying to pay on time wherever possible. For a firm like M&E specialist Michael J Lonsdale, the issue goes beyond the right thing to do.

“Ultimately, our approach is that the performance of us as a business is only really as good as what the subcontractors provide,” he said. “And if we starve them, they don’t perform and that has an impact on us as a business in terms of reputation.”

When it comes to improving the situation, Willmott Dixon senior project surveyor Katie Butler said that company culture is vitally important. “As quantity surveyors, we’re really highly monitored on how we pay our supply chain and also our invoices,” she said. “If I’m not putting out the payment on time, it’s a bit of a red mark against myself, so that process within Willmott makes it something that we all want to do, along with the fact that it helps with our supply chain’s cashflow.”

However, Butler admitted there was little she could do to ensure Willmott Dixon’s subcontractors follow the same protocols when it comes to paying their suppliers. “I confess there’s only so much you can really ask regarding that,” she said. “[But] during COVID-19, we’ve really been pushing that. We’ve been asking our clients to make sure our payment terms are adhered to so that we can make sure [we can do the same for our] subcontractors and our suppliers.”

Of course, company cultures can take a long time to change, even if leaders have the will. As a result, other means of trying to boost equity are gaining currency. For instance, project bank accounts (PBAs), whereby funds are held in an independent bank account, can be used to ensure that all parties get paid at the same time. It’s something that Richardson said U+I has been experimenting with.

“The day the main contractor is paid, those specialists get paid too,” he said. “I know it’s not particularly liked by main contractors, but I’ve got to say that we’ve administered it now for four years and I’ve no complaints with it. Those specialist trades have the confidence in that they know they’re going to get paid.

“Therefore, they staff those contracts properly, the materials are there […] it really does lubricate the whole system. If we’ve got the flow of money going straight to the specialists without delay, we’ve got their attention and the projects definitely benefit.”

The PBA argument

Central government is increasingly using PBAs, but outside that niche they remain far from commonplace. Rob Driscoll, veteran construction lawyer and director of legal and business at umbrella body ECA, said that further research is required. “The issue for me with PBAs, at the moment, is we have no visibility of the reasons why they’re not used,” he said. “Where people were saying no and the reasons are not published. There is no scrutiny over them. If they do work, when do they work? Why do they work and can we start learning for future projects?”

“Organisations have to consider digitisation of the back office. The technology is available so there’s no reason why this shouldn’t happen”

Steve Cooper, Oracle Construction and Engineering

What’s more, Driscoll said, PBAs only get you halfway there. They may ensure that all parties get paid at the same time, but the potential for dispute in terms of things like variations and subcontractors having confidence in how much they will get paid are still all apparent.

“Don’t forget, the contract chain is still in place alongside the project bank account, so you could face disputes over premature delivery of materials or someone’s claim they’ve done two floors when they’ve done one,” he said. “You can still have those disputes. The main contractor is still in charge of valuing. That’s not taken away.”

He added: “What it doesn’t do is make treatment transparent – you need to couple it with a digital payment platform, otherwise, you still won’t get that. Then you start to streamline the process by designing these things out, designing the waste out of the system. That then underpins the administration of the PBA.”

Digital system needed

However, when it comes to digitisation, it appears that construction is still some way behind other industries. Oracle’s Cooper said: “If I look at other industries, like aerospace and defence, for example, they’re better but they’re not perfect.

“I don’t think any industry is perfect in the way money flows, but they are further ahead and probably have less complex supply chains. I think that’s one of the advantages that some other industries have structurally.”

While the US has taken the lead around digitisation of payments, uptake is growing in the UK, too, but more needs to be done, Cooper argued. “Not just in tier one, but all around the supply chain, companies are making some significant improvements in the way that cash is flowing in the industry in the US and we need to start seeing more of that here.

“In the UK, what needs to change is organisations have to consider digitisation of the back office with the same level of importance as digitisation of project activities and processes. The technology is available so there’s no reason why this shouldn’t happen.”

Roundtable sponsored by Oracle Construction and Engineering