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How can the construction industry solve the late payment epidemic? Richard Sutton has one solution

An unfortunate reality of firms working in the construction industry is the difficulty of managing their cash flow and getting paid on time. In a sector responsible for 6% of UK GDP, these cash flow gaps can have far-reaching consequences for the economy.

Nowhere is this more evident than with the fallout from the collapse of Carillion, which has caused cash flow gaps to reverberate around the economy since the beginning of the year. The problem is serious enough that the government recently appointed a Small Business Commissioner whose remit solely consists of remedying this issue.

A solution to cash flow gaps in the construction industry would be a serious salve for the economy. We argue that this could come in the form of cloud accounting technology, which creates a unique opportunity for construction companies to improve efficiency and to better manage collection of payments, alongside access to finance to cover cash flow gaps.

Long supply chain

But first, why are late payments so common in the industry? Late payments are a particular problem in construction due to the sector having such a long supply chain, consisting of specialists and subcontractors. This means that it can take time for subcontractors to get paid due to payment needing to pass through a number of different parties to reach them. It is estimated that Carillion owed £1 billion to up to 30,000 businesses at the time of its collapse.

Mark Telford, Director of Telfords Chartered Accountants, a firm that specialises in the construction industry, said: “If a client doesn’t pay his subcontractors on time each week they will often walk off site and look for work elsewhere. It can then be very difficult to get that labour back, which in turn affects the ability to deliver client work on time.”

He said that subcontractors waiting for payment are reluctant to take legal action due to fear of losing business.

How do business owners navigate this environment? Colin Kent, owner of Pembrokeshire based CK Roofing Contractors Ltd, issues all of his invoices on 30-day terms and frequently suffers from late payers. “I always send a reminder out straight away when invoices are late. However, some clients aren’t on the ball and often delay payment by a few weeks. This has knock-on effects for cash flow in the business.”

Speeding up payments

In the meantime, there may be opportunities closer to home to solve these problems. The development of cloud accounting software such as Xero and Quickbooks, alongside an ecosystem of add-on partners, makes it relatively easy for construction companies to access up-to-date information on their finances, as well as giving them tools to facilitate faster payment and issue invoices.

“We encourage our clients to get their clients to pay by direct debit. GoCardless and iZettle have revolutionised the way in which small businesses can improve their cash flow,” says Mark Telford.

The benefit of using these tools is to be able to issue invoices and collect payment on the go, while on a job as opposed to retrospective billing.

As well as improving cash flow these tools can significantly reduce the time spent on credit control.

Easy access to finance

A number of debt finance providers now also integrate directly with cloud accounting software, which makes it fast and hassle-free for construction companies to access finance to cover late payments.

Revolving credit facilities, such as iwoca, are similar to overdrafts in that they allow business owners to just pay fees on what is borrowed.

Robert Bailey of Swallow Hill Homes, a company that converts historic buildings into residential properties, uses iwoca to draw down on what he needs to pay on a daily basis. He lists its key benefit as the “money arriving straight away” into his bank account. This then allows him to log onto his business banking and have adequate funds to set up payments for his suppliers.

Conclusion

Construction companies shouldn’t wait for changes to public policy to reduce late payments. Instead, they should be encouraged to take advantage of advances in cloud accounting software to manage their day-to-day finances and reduce the time they spend on chasing invoices. When the next Carillion collapses, we can all be better prepared.

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