As the government’s Payment Practices & Performance Regulations are set to expire on 6 April 2024, Payapps reflect on how the beneficial regulations have been in building a more responsible construction payment culture
In the past, the construction industry has been referred to as the “building game”, describing a time when ultra-competitive tendering and 15% interest rates fuelled delayed payments and left a legacy of poor payment practices in its wake.
Thankfully, the industry has worked hard to stamp out these practices and introduce professional standards for companies to maintain.
However, even after the publication of legislation, the construction industry still experiences some of the old contractual cultural practices, such as extended payment terms and creatively worded pre-conditions, which are essentially designed to control cash.
Retention too still, unfortunately, contributes to late or poor payment practices, and in some cases non-payment for work completed.
The impact of late payments
Late payments can have catastrophic effects across the construction supply chain, seriously impacting clients’ and contractors’ ability to deliver projects on schedule, to specification and within budget.
In extreme cases, late payment can lead contractors to insolvency and put multiple projects at risk. Businesses’ relationships and reputations deteriorate, compromising creditworthiness and the tender process. The ability to recruit skilled contractors can also be affected and productivity is impacted.
Payment reporting regulations
The Payment Practices & Performance Regulations 2017 require the UK’s largest companies and LLPs to broadly report every six months on their payment practices, policies and performance for financial years beginning on or after 6 April 2017.
The purpose of the reporting is to provide scrutiny and transparency on payment practices and behaviours in the UK and to provide SMEs with commercial data to inform trading decisions and prevent these all-too-common problems from taking place.
Given the persistent issue of late payments to small- or medium-sized enterprises (SMEs), the government recently sought views on proposals to amend and improve the Payment Practices & Performance Regulations, and whether the regulations should extend beyond April 2024.
A review of payment construction payment practices and reporting
In light of these developments, a webinar held by Payapps discussed the impact of the regulations and the government’s suggested improvements. Rob Driscoll was joined by Graham Dundas (chief finance officer at Wilmott Dixon), Paul Heath (managing director at Morgan Cass), Steve Dean (commercial manager at Adexsi UK) and Anthony Puma (senior business development manager at Payapps).
Wilmott Dixon has worked with Build UK to develop specific guidance around consistently applying an approach where metrics are proportionately considered in construction payment practices. Both organisations acknowledge that league tables are a key statistic of industry performance and are effective in shining a light on performance, holding organisations accountable.
Graham commented: “At Willmott Dixon, we see paying our supply chain on time as being a key statistic that we benchmark ourselves against, and seeing how others perform is always interesting in thinking and driving best practice… I think the fact that we have a consistent framework to work to and that as directors, we have to sign up to the accuracy of those disclosures, is really significant.”
Rob Driscoll asked the panel whether the government reports are maintaining credibility or whether they must evolve. The panel concurred that the reports are influential but not a conclusive factor in making commercial decisions and that one of the biggest challenges is making the pan-industry measures more relevant for the construction sector.
Graham Dundas maintained that metrics being entirely related to the volume of invoices may distort the industry’s view of payments being made on time, because of the disproportionately large number of low-value invoices that make up a project: “I think anything that brings some value-related metrics into the equation is really useful.”
Agreeing the value of work done is key to construction industry payments and it is not only prompt payment but fair payment that is important, Steve Dean commented: “What’s very important to us is what is being paid because you can be paid on time but are we being paid 50% of what we’ve asked for?”
So while the regulations demand a measure of the speed at which the industry pays, they fail to address the amount paid. Once the application has been submitted and during the certification process, time-consuming disputes regularly arise around valuations, which themselves can seriously delay the time to payment.
Digitisation for improved payment practices
While benchmarking payment practices has been advantageous, there is still room for improvement when it comes to supply chain payments.
Businesses have the ability to cultivate a responsible construction payment culture by changing their own behaviours and digitising the payment process using Payapps is a good example.
Using this software, all project parties experience improved collaboration online to streamline the submission and certification of applications for payment. Greater transparency around the valuation process, variations and retention is achieved, significantly reducing disputes, payment delays and project risk.
Commenting on Morgan Cass’ digital transformation, Paul Heath explained that in the past, receipt of miscalculated spreadsheets and applications for payment in all sorts of formats meant payment management was time-consuming but that adopting Payapps across the business has been transformative: “Introducing Payapps, it really has streamlined the process massively… I’d guess it probably saves three or four days’ administration time a month processing our applications now. We can also put forward our own applications and know they’re going to be accurate.”
Indeed, accuracy is key for timely payments as well as good cash flow forecasting, both imperative for sustainable supply chains and profitable projects.
Streamlining the payment process makes sense and Payapps provides the collaborative digital approach that the Construction Playbook and many forward-thinking industry participants have been calling for to encourage a responsible construction payment culture.
Click here to watch the webinar recording or read the full report.
*Please note: This is a commercial profile.
Chloe Leigh
Head of Marketing UK&I
Payapps
Tel: 0191 651 1765
