The recent parliamentary inquiry into late payments of commercial debt has confirmed something that we in the invoice finance industry have known for a long time – that suppliers are having trouble with cash flow problems due to tardiness with payments from customers.
Subcontractors in the construction industry suffer from poor treatment, and MPs have recommended a construction ‘Code of Conduct’, regulated by an independent adjudicator – the main points being that subcontractors should not have to ‘apply’ to be paid, as this slows down the payment process and can drive down the amount agree on, and that main construction companies should provide more transparency when it comes to payment periods and processes.
Not all construction firms are set to hoodwink subcontractors, but it was often the case that some of the larger construction firms seemed to have active policies of payment avoidance. Subcontractors suffering from financial difficulty are often hit the hardest, with the severe consequence, in some cases, of business demise.
In my view, there is a range of reasons why slow payment by main contractors occurs. For example a sub contractor might not be performing within the terms of the contract – in situations like this the main contractor is justified in withholding or disputing payment.
On the other hand I have witnessed situations where the main contractor appeared incentivised (due to onerous terms within their contract) to very quickly withhold and/or dispute payments at the slightest whiff of a problem with the sub contractor. A cynic might also say that there is sometimes more profit to be extracted from a job in the event of liquidated damages clauses being evoked by the main contractor, but it is also often the case that sub contractors are unable or unwilling to ask for changes to main contractors’ terms.
Delays and the withholding of payments by main contractors can also be due to unsigned variation agreements, where additional work has been carried out by the sub contractor without the appropriate authorisation. It is imperative that these are signed in all cases, as they tend to be due for payment at the end of contracts, when sub contractors have less leverage to get the payments approved.
Often businesses will have underlying problems when contracts are not performing. However, I would personally like to see more understanding and interaction from main contractors, as well as an obligation, perhaps, to try and work through any problem to find a feasible conclusion for all parties rather than immediately looking to contractual terms by way of solution.
The Code Of Conduct
In my view, any Code of Conduct would be beneficial for subcontractors (many whom we assist with funding requirements). It will also certainly help improve the reputation of the industry in general, as well the funding of it. Many funders (who have experienced rough times themselves in the last few years) have seen construction funding as a sector for which low levels of funding are justified, especially in comparison to other sectors, where payment terms and contractual liability offer lower risk. A code of conduct will not only help subcontractors, but also allow the construction industry to grow.
A Final Note
I should note that Touch Financial is a specialist in sourcing working capital solutions for construction companies and businesses which work within the confines of contractual relationships with their customers. Our services are free of charge to our customers.