All I want for Christmas is… what I am owed

Iain McIlwee is CEO of the Finishes and Interiors Sector

For many in construction, Christmas is not the season of goodwill. Sadly Ebenezer Scrooge has always had his hands on construction’s cash as we head into Christmas.  The old excuse was that the office was shutting and no one was around to process the payments. With online flexible banking this rings a bit hollow, yet we still see companies hoarding cash at the year end.

I’m a supporter of the Prompt Payment Code. Signatories commit to paying at least 95 per cent of their invoices within 60 days and at least 95 per cent of invoices from small firms within 30 days. However, making those commitments and sticking to those payment promises may well be two different things.

“Fudging the December payment run is a practice that goes back years. It is another example of poor behaviours in construction that carry on in plain sight”

In a separate scheme, big qualifying firms have a duty to report their payment practices to the government twice a year. If we are to believe the stats, we are getting on top of payment issues –average payment times for invoices from main contractors are officially not much higher than 30 days. But averages belie the truth. The murky world of payment applications, pay less notices, certification and underpaying means the invoice is but a small cog in a giant wheel.

The sad fact is that, in the final weeks of 2022, an industry battered by pandemics, hyperinflation, labour shortages, rising costs and shrinking availability of credit is just as bad at paying as ever or, according to 21 per cent of our specialists in a recent Finishes and Interiors Sector survey, worse.

Common conversations

Here are the experiences of members of our community I have spoken to recently, reflecting conversations that are worryingly common:

Member A: “Fudging the December payment run is a practice that goes back years. It is another example of poor behaviours in construction that carry on in plain sight.  Continually chasing payments throughout the year and having to issue seven-day notices is something that we do not do lightly, but without these there is no guarantee that we will receive our payments. It’s mid-month and we currently have £970k we consider to be overdue for December. This puts huge pressure on cashflow.

“Everybody just puts up with it as ‘normal for construction’. Some of the main contractors’ QS’s are fully aware of the December ‘issues’ and are very open about it, but their hands are tied by the ‘finance teams’.

“They use every excuse under the sun, blaming holidays and admin challenges, but the result is the same – another stressful Christmas for sub-contractors.

“We read about Prompt Payment Codes and see these written into procurement frameworks and advocated by the government, but none of these schemes will save our business if main contractors continually certify less than 90 per cent of the application value. I keep hearing that we have a choice who we work for. Equally people have a choice who they buy from. When it comes to contracts for big public projects, is it right that they keep being awarded to companies that are happy to leave their supply chain hanging over the holiday period?”

Member B: “I am sick to death of begging for money. It isn’t just Christmas. It goes on all year, but definitely gets worse as we move to reporting periods. I attend meetings all the time where I am told businesses pride themselves in paying on time, but it is the spurious underpayments and unsubstantiated pay less notices that they don’t talk about. It feels like death by a thousand cuts. We pay our workforce in full and on time weekly. If we didn’t, we wouldn’t have a workforce.

“In the last few weeks I was due a £240,000 payment and the remittance came through for just under £100,000. I eventually got hold of the QS after repeated phone calls and emails to be told that all the applications were approved and it must be an error in accounts. Accounts referred me back to the surveyor. All the time I am £140,000 short. The next stage is chasing the commercial team and eventually the MD. I very much doubt, and carry the weight of the fact, that this money is unlikely to come in before Christmas.

“At the same time, another invoice for £250,000 came in, two weeks late using ‘year end, you know how it is’ as the excuse after repeated chasing. This problem is repeated across our client base and at any one time around £800,000 of our money can be sitting in other people’s bank accounts. How can it be acceptable that bigger customers use me, the smaller supplier, as a bank and risk pushing me out of business?

“This is building to a crisis point and it is so easy to see how companies slip off the edge. We are being pressed on competence and compliance, to do more in terms of training and sustainability, but our efforts and energy is wasted chasing cash. If we want to innovate and evolve as a supply chain we can’t do this by driving smaller agile and innovative businesses into the ground.”

An industry-wide problem

These stories are mirrored throughout the supply chain, with fit-out contractors and specialist sub-contractors reporting concerns over payments being withheld. To address a growing number of issues, we have drafted in experienced adjudicator Len Bunton as a consultant adviser to help our community navigate these choppy waters.

He says: “I am very concerned about the level of issues we are encountering relating to payment. The industry needs to improve its management of the commercial side of contracts, and this should help greatly to reduce some of the current problems. Project bank accounts will help, as will utilising the Conflict Avoidance Process (CAP). I think the public sector needs to lead by example and take far greater interest in ensuring that payment is getting to the supply chain at the right time and in the right amounts. A shaking of the head and saying, ‘this is nothing to do with us’, does not help the industry.”

Indeed, project bank accounts and the CAP create a more transparent and collaborative approach. The government does have a role to play too – business secretary Grant Shapps has announced another “comprehensive review” into tackling late and poor payment practices and the Procurement Bill continues to work through the government. This time policy-makers must not shy away from ensuring value of invoice is part of the duty to report. Unless that happens, the system will be gamed further.

We all need to reflect and top of our New Year’s resolutions list has to be taking a pause to consider the impact of these behaviours on an already beleaguered supply chain. We must find a better way or we simply won’t transform, or in many cases even exist, by next Christmas.