Small construction companies threatened by late payments, research shows

The survey (21-page / 1.1MB PDF) by credit reference agency Graydon, on the late payment of trade invoices, found that companies in the construction sector were worst affected. 51% of the 500 small businesses surveyed across various sectors said that late payments were "a problem" for their businesses, while 56% of those respondents not paid on time were forced to pay their own suppliers late in turn.

Of those firms surveyed in the construction industry, 53% saw late payments as a "significant problem" compared with around 20% of those in other sectors including retailers, distributors and restaurant owners. 31% of construction companies said that they had "almost gone out of business" as a result of late payments, compared with 19% of manufacturers and 5% of retailers.

Construction law expert Shy Jackson of Pinsent Masons, the law firm behind Out-Law.com, said that the issues caused by late payments were identified as a major problem in the construction industry during Sir Michael Latham's review of the construction industry in the 1990s. The Latham Report led to the Housing Grants, Construction and Regeneration Act (Construction Act) in 1996, which had several aims including improving cash flow in the construction industry.

"What this research indicates is that the Act has not achieved its aims of improving cash flow in the construction industry," he said. "It may be too soon to judge whether the recent amendments which became effective in October last year will change the position, but one suspects that they will not resolve the fundamental problems which arise as a result of the current economic situation. If the cash is not available in the first place, the Act is unlikely to provide relief."

Last year's amendments to the Construction Act, which came into force on 1 October 2011 in England and Wales and 1 November 2011 in Scotland, were intended to introduce a fairer payment regime and created an improved right for contractors to suspend their work in cases of non-payment. So-called 'pay when paid' clauses, which make payment conditional upon receipt of payment from a third party, have also been abolished.

Gordon Skaljak of Graydon UK said that the current economic climate made it "more important than ever" that companies understand cash flow and other risks triggered by late payments.

"Companies cannot achieve sustainable growth if they aren't paid on time consistently," he said. "The business community and the Government must join forces to protect companies by stamping out the UK's late payment culture."

The Forum of Private Businesses (FPB), which contributed to the research, said that professional bodies had a responsibility to "persuade large corporations to embrace paying their suppliers on time and in full". The research uncovered 278,000 cases of suppliers unilaterally changing their payment terms and 135,000 businesses who had seen supplier credit withdrawn without notice. A "similar number" had demanded discounts for prompt payment that were not agreed at the start of the project, it said.

"[Late payment] decimates cash flow, kills growth and innovation and ultimately forces businesses to the wall," said FPB chief executive Phil Orford. "We need to... communicate to business owners exactly what they can do proactively to minimise late payment, including putting in place robust cash flow management procedures and even simply invoicing properly and on time, then we need to provide the support and services they need to make tackling late payment a standardised business process."