The UK Construction Sector’s B2B Payment Practices Crumble

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Late payments are considered an epidemic by some in the U.K. as small businesses struggle to keep their financial heads above water.

Just this week, researchers at Amicus Commercial Finance found that SMEs in the U.K. write off $62 billion in unpaid invoice debt as losses every year. For the companies that do ultimately receive payment for their outstanding bills, the payment terms can be long and disrupt cash flow, leading business owners to struggle with paying their own suppliers and employees.

A new report from Bibby Financial Services has uncovered one industry in the U.K. that is especially struggling with late B2B payments.

Research published Monday (Nov. 28) concluded that 55 percent of companies in the construction subcontracting industry feel powerless to influence the payment terms of their contracts with larger construction companies.

“All too often we see the battle of David versus Goliath in the construction industry, with larger contractors wielding the power and smaller firms reluctant to negotiate terms through fear of losing future work or gaining a reputation for being difficult,” stated Bibby Financial Services Managing Director of Construction Finance Helen Wheeler.

The company outlined its findings in its Subcontracting Growth survey, which also revealed that more than 27 percent of subcontractors in this space agree late payments from their top contractors is the largest challenge for the new year. That’s more than the number of small subcontracting firms that say skills shortage and U.K. economic health are their biggest hurdles over the next 12 months.

The issue of late payments continues to impact this industry, despite earlier action taken by the Construction Leadership Council. The government group introduced the Construction Supply Chain Payment Charter earlier this year in an effort to reduce construction payment term lengths with suppliers.

According to Wheeler, subcontractors need to set their anxieties aside and begin price and contract negotiations.

“Understanding and negotiating suitable contract terms is critical in ensuring that projects are priced accordingly and profitable for subcontractors,” the executive added.

 

Other Challenges Ahead

SMEs in the construction industry are facing a slew of other financial hurdles that compound on top of the ongoing issue of late B2B payments, Bibby Financial Services found.

Nearly a fifth of the companies surveyed, for instance, said that Brexit is likely to have a negative impact on their business, with 17 percent reporting that Brexit will be straight-up bad for their companies.

“On the subject of Brexit, subcontractors are divided,” Wheeler explained. “For some, it will help the U.K. to secure infrastructure investment from wallets further afield than Europe. Others see it posing a threat to labor pools and a cause of significant inflationary pressures.”

Another issue compounding cash flow struggles is that these companies, which are already afraid to negotiate their contracts with large construction firms, are dealing with a high volume of these contracts to begin with. On average, these businesses handle 40 contracts every year, with each contract averaging a value of more than $256,000.

A fifth of SMEs in this industry surveyed by Bibby Financial Services reported that there are penalty clauses imposed in these contracts from their top contractors, and those clauses are negatively affecting their business.

According to reports by SmallBusiness.co.uk, Peter Vinden, who serves as managing director of construction industry specialists at The Vinden Partnership, said many of these problems are well-known throughout the sector.

“Ensuring that they are not signing contracts with unfavorable terms or clauses could be the difference between taking on a profitable project and insolvency,” he warned. “The impacts of signing contracts with onerous terms or clauses can be anything from a lack of cash flow preventing salary payments through to insolvency, so it really is important that firms ensure they’re negotiating the best terms for their business and seeking help where they need.”

With small construction subcontractors in the U.K. already facing financial pressures from within the industry and from the external, national economic and political climate, Bibby Financial Services’ Wheeler highlighted how delayed and late B2B payments in this space can be detrimental.

“One thing that is clear is the impact poor payment practices are having on the industry,” she stated. “It is unsurprising but discouraging that late payment from main contractors is still an issue for smaller construction firms across the country.”