Construction payment software provider Payapps has launched a new paper, ‘Construction payment practices review: Building a responsible payment culture’, which discusses the latest payment practice regulations, and how companies can ensure fair payment using technology.
The Payment Practices and Performance Regulations 2017 requires 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 Duty to Report on Payment Practices and Performance states information must be published through an online service provided by the Government within 30 days of the end of the reporting period and is available to the public.
Construction payment practices review: Building a responsible payment culture
The objectives of the reports are to increase transparency and public scrutiny of the payment practices and performance of large businesses, to allow suppliers to make informed decisions about who to trade with, negotiate fairer terms and challenge late payments. Build UK collates and publishes key data from the reports.
Their payment practices reports provide the latest information on the payment performance of the largest companies in the construction sector and central Government in order to provide transparency for the industry.
Given the persistent issue of late payment to small or medium-sized enterprises (SMEs), the government has been seeking views on proposals to amend and improve the Payment Practices and Performance Regulations, and whether they should extend beyond their current expiry date of 6 April 2024.
Findings were concluded from a recent Payapps webinar
The Construction Payment Practices Review details the findings from a recent Payapps webinar, which was chaired by Rob Driscoll (Director of Legal & Business at ECA, Chair of the Cabinet Office Payment Advisory Group).
Rob Driscoll was joined by panellists Graham Dundas (Chief Financial 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) to discuss:
- Why the regulations and Build UK payment practice reports were introduced
- How far reports have transformed behaviour and whether the reports match the reality of the industry experience
- Whether the payment practice reports are relied upon for subcontractor commercial decision-making
- Proposed amendments to the Payment Practices and Performance Regulations, including the potential benefit of a ‘value’ reporting metric
- How companies can ensure fair and prompt payment by using technology to adopt a collaborative approach to variations and supply chain applications for payment.
The poll respondents and audience of 81 included a mix of contractors and subcontractors.
The issue of late payment in construction
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.
This created an environment where techniques such as delayed payments or drafting of onerous contract terms were used to hold on to cash.
Thankfully, the industry recognised some of those negative behaviours and has worked hard to stamp out these practices, introducing 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.
Every year, thousands of construction businesses experience severe administrative and financial burdens simply because they are not paid on time. Late payment is a key issue for businesses, especially smaller businesses further down the supply chain, as it can adversely affect their cash flow and jeopardise their ability to trade.
Payment reporting is, therefore, particularly relevant for the construction industry given the current culture around payment practices and the trend of late payments.
Construction payment practices and performance review
In recent research conducted by ACA on behalf of Payapps to understand the link between digital adoption and resilience, almost a quarter (23%) of construction companies in UK and Ireland have had more than 50% of their payments in the last year either late or delayed, while a fifth (20%) said their finances were heavily impacted by late or delayed payments over the previous year.
Undeniably, late payments can have catastrophic effects across the construction supply chain, seriously impacting clients’ and contractors’ ability to deliver projects on schedule, to specifications 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
finance and creditworthiness and the tender process.
The resulting ability to procure skilled contractors is also affected and productivity is impacted.
During our webinar, Rob Driscoll explained that the purpose of the government’s report on the Payment Practices and Performance Regulations is “to provide scrutiny and
transparency on payment practices and behaviours in the UK and to provide SMEs with commercial data to inform their trading decisions,” and ultimately prevent these all-too-common problems relating to late payments.
In addition to the aforementioned longstanding issues, the construction industry has also sustained some economic damage following the pandemic due to supply and demand disruption, exacerbated inflation, workforce reduction and material shortages.
These circumstances have meant that the effects of poor payment practices are more
keenly felt. It is important to provide a holistic overview of the construction sector’s diverse payment practices, such as pay less notices, self-billing, VAT, retention and supply chain finance schemes.
In support of the industry making informed commercial decisions, Build UK is supporting and raising awareness in the industry by compiling the data published under the Government’s Duty to Report on Payment Practices and Performance. The data shows a vast improvement in payment performance since the information was first published in July 2018.
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. Additionally, both organisations acknowledge that league tables are a key statistic of industry performance and are in support of their development to ensure a consistent framework for the entire sector.
Rob Driscoll asked the panel whether the government reports are maintaining credibility or whether they must evolve given the context of the consultation. The panel concurred that reports have been effective in changing behaviours for large businesses, although they have not been as effective as was expected in terms of usefulness to potential suppliers.
Indeed the audience was surveyed during the webinar to gauge the usefulness of the Payment Practices Report to the industry, and only 12% said they consult it some or all of
the time.
Of course, it very much depends on the size of the contractor as to whether there would be
a duty to report on their payment practices.
If a business is considering working for a contractor that doesn’t meet the criteria, then
there would be no need to consult the tables at all.
So what are the qualifying criteria? Two or more of these general thresholds should be
met for a contractor to need to report under the government guidance:
- £36m annual turnover
- £18m balance sheet total
- 250 employees
Businesses in scope of the reporting requirement must prepare and publish information about their payment practices and performance in relation to qualifying contracts, for each reporting period in the financial year.
Despite the qualifying criteria, Paul Heath, Managing Director at Morgan Cass, remarked
that the poll results are indicative of the industry’s scepticism of the reports, and that
additional real-time data is needed to create a more definitive picture of the current
payment landscape.
While Paul does refer to the reports occasionally to better understand the payment performance of a potential client before working with them, he commented, “I prefer to speak to the supply chain members that work with any particular contractor, to see what their experiences are.” Steve Dean, Commercial Manager at Adexsi UK, chimed in here saying that notifications via credit insurance bulletins helps his team to understand and assess any risk associated with particular contractors.
The panel generally agreed that the information from the government’s reports is influential but not a conclusive factor in making commercial decisions, and that one of the biggest challenges is making the reports more useful to suppliers across the construction sector.
As Graham Dundas, CFO for Willmott Dixon pointed out, “I think the biggest challenge
is going to be that they are pan-industry measures rather than being construction-centric… when it comes to the challenges of valuations and being knocked back on value, those things are very unlikely to make it into an evolution of the wider requirements that the Government’s Department for Business and Trade publishes.”
The challenge of construction valuations and retention
Alluded to by Graham, agreeing the value of work done is key to construction industry
payments, and it is not only ‘prompt payment’ but ‘fair payment’ which 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 fifty percent of what we’ve asked for?”
So while the regulations measure the speed at which the industry pays, it fails 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 time to payment.
This raises the question, from what point do you measure ‘days to payment’ – application
submission date or certification date? Rob Driscoll helped out here: “The guidance says you should measure from the date of application because that’s the first date on which the payer is notified of the amount due, even if they disagree with it in a payment notice or pay less notice.
But complications come from misunderstanding the detail, and sometimes, I think the misalignment of reporting can either be a genuine mistake or possibly the choice of compliance with the regulations but not the explanatory non-compulsory guidance.”
But it is only ‘guidance’ and the panel questioned how far an organisation needs to
comply with this when there is little evidence of enforcement or even any auditing in
relation to reporting.
“Can you flood your report with chip and pin, or tap and pay expenses?” asked Rob Driscoll.
“You’re not supposed to, but there’s nothing in the regulations stopping it. That will present a false positive picture and then that will trickle into the league tables as well.”
Graham admitted that the regulations are very much self-policed, which means directors
must ensure that the payment reporting is accurate before publishing the data.
He maintained that metrics being entirely volume-related do not represent an accurate
depiction of payments as smaller value items in works packages are not indicative of what
a supply chain partner on the contractor side could expect.
“Main contractors in particular will pay hundreds, even thousands of low-value invoices for prelims, small value materials etcetera, but probably only one payment a month to each of the works packages on a contract. And because the metrics are by volume, that can be very distorted… so I think anything that brings some value-related metrics into the equation is really useful.”
Adding a new metric for the total value of payments not paid within agreed terms is one of the proposed reforms to the Payment Practices and Performance Regulations and proved to be the joint most popular amendment when we polled our audience.
Equally popular was to amend the regulations to explicitly include time from submission of
application to certification in order to account for any time taken debating valuations.
Download the full eGuide to learn more.
