Improving Payment in Construction
The Prompt Payment Code, combined with the Government’s Duty to Report on Payment Practices and Performance Regulations, has played a key role in transforming the culture around payment in the UK construction sector.
Construction is made up of around a million businesses, 99% of which are SMEs. During economic slowdowns and global events such as the COVID-19 pandemic, these businesses face significant cash flow pressures. In fact, nearly all construction companies, no matter what their size, face cash flow pressures given the typically low margins on which they operate.
Build UK, as the trade body representing more than 40% of the construction sector, has been tackling the industry’s late payment culture and seen real progress in recent years. In 2018, the enactment of the Government’s Duty to Report Regulations enabled Build UK to begin benchmarking the payment performance of our members and the wider industry.
This data, which can be found on the Build UK website, has been widely used by the sector and covered in the trade media, leading to significant improvement, particularly amongst Build UK members.
In 2018, our tier one Contractor members took an average of 45 days to pay invoices, with only 63% of invoices paid within agreed terms.
Since then, they have reduced the average time taken to pay invoices to 30 days, which is the expected standard for business. In addition, 80% of invoices are now paid on time and the percentage of invoices paid within 60 days has increased from 82% to 94%.
Compiling the data in this way has allowed Build UK to present a coherent picture of payment practices within the industry. Whilst this transparency has been uncomfortable for some, it has led to peer pressure among senior leaders of businesses to move up the table. As a result, the majority have put significant effort into transforming their internal systems to improve the efficiency and speed of payments. They have also provided help and guidance to suppliers, predominantly SMEs, on how to submit invoices correctly to ensure prompt payment.
Most importantly, the data has empowered small businesses to take informed decisions regarding which large contractors they wish to work with.
Still, there is more to be done, and Build UK will continue to work with our members to improve practices and expand the culture shift across the entire sector.
We believe that the entire payment reporting environment needs to be made simpler, with greater alignment between the data required under the Duty to Report Regulations and the requirements of the Prompt Payment Code.
In addition, we are calling on the Government to ensure that public sector bodies are subject to the same Duty to Report requirements that apply to the private sector. The role of clients is very important in setting the tone of payment culture, and this would enable like-for-like comparison between the public and private sectors.
Fair and transparent practices are essential for a successful construction industry, particularly in the current challenging business environment. We would encourage other sectors to pursue a similarly transparent approach that shifts the underlying culture towards prompt payment, which we know is what actually drives real change and ultimately improves business performance.