In an era where the construction industry faces unprecedented scrutiny over its financial and ethical practices, the spotlight has turned sharply towards the endemic issue of late payments - a challenge that not only undermines the stability of small businesses but also poses a significant threat to the broader economy.
In response to this long-standing issue, the government intends to reduce payment terms to 45 days by April 2025. A further goal to reduce payment terms to 30 days is also close to being confirmed.
The need for change
The necessity of this shift - great though it may seem - cannot be overstated. Late payments, long normalised within the construction sector, have not only stifled growth and innovation but have also precipitated a financial domino effect that has left many small and medium-sized enterprises teetering on the brink of insolvency, and all too often falling over the edge.
However, it's crucial to recognise that the construction industry, often seen as the "bad boy" for such practices is, in many cases, no worse than other industries. Sectors such as retail and hospitality have similarly struggled with these issues but without the same level of scrutiny.
As Philip King, an advocate for prompt payment practices, emphasises in our latest webinar, the forthcoming changes are not merely legislative mandates but a call for a fundamental realignment of business values towards greater accountability, mutual respect, and a deeper understanding in the construction industry – ongoing improvements in a sector that has already made great progress in recent years.
What are the implications of these new measures?
Unpacking the prompt payment initiative
With the government's introduction of stringent requirements for businesses vying for public sector contracts—specifically, those exceeding the £5 million threshold—a clear pathway emerges toward a more equitable and sustainable operational framework.
These businesses are now compelled to demonstrate they are paying invoices within a 55-day window, a precursor to the ambitious target of a 45-day payment term by April 2025, with the ultimate aim of establishing a norm of 30 days.
The government hopes that this change will help small businesses’ cash flow and engender a culture of trust and cooperation in the sector.
Cultural shifts in the construction industry
The call for a cultural overhaul within the construction sector is both urgent and important. As Philip King points out, the challenge of late payments is not merely one of logistics or policy but of entrenched attitudes and practices that pervade the industry from top to bottom.
This is not an ailment that can be remedied with superficial changes or half-measures. It demands a comprehensive shift in how businesses perceive their obligations to partners and the broader ecosystem.
"This isn't about changing a process at head office," King remarks, "This is about changing the culture from top to bottom.”
Reclaiming integrity
Addressing the obstacles to prompt payment requires dismantling the bureaucratic and procedural barriers that often delay transactions. King emphasises the importance of prevention over cure, advocating for businesses to proactively align their operations with the new standards well ahead of regulatory deadlines.
Yet, the challenge extends beyond mere procedural compliance. Businesses must become more self-reflective and realign their values with the principles of fairness and responsibility. The industry has long been marred by a reputation for sluggish and unreliable payments, a cycle that has perpetuated financial uncertainty for smaller contractors and eroded trust within the sector.
This transition, King argues, is not just about adhering to new payment terms but about building a solid foundation of integrity and reliability.
The economic and competitive implications of prompt payments
The shift towards prompt payment practices in the construction industry is not just a matter of regulatory compliance or operational efficiency. It is a cornerstone for building a more robust and equitable economic framework that has implications for the economy as a whole.
By ensuring that payments are made promptly, the industry not only bolsters the financial stability of its supply chain but also injects vitality into the broader economy. This is particularly critical for SMEs, which often operate on razor-thin margins and can be disproportionately affected by delayed payments. The ripple effect of prompt payments facilitates increased investment, job creation, and innovation, fostering a healthier and more dynamic economic landscape.
Moreover, businesses that embrace prompt payment practices stand to gain a competitive edge. In an industry historically marred by payment delays, companies that consistently meet their payment obligations on time are more likely be viewed as partners of choice. This reputational capital is invaluable, enhancing a company's attractiveness to both potential clients and suppliers.
In a world increasingly focused on sustainability and corporate social responsibility, the construction industry's commitment to prompt payments reflects a broader understanding of its role in fostering a healthy economic ecosystem. By prioritising the financial well-being of all stakeholders, the industry can pave the way for a future where success is measured not just by profit margins but by the positive impact on communities and the economy at large.
The role of technology in prompt payments
The increasing digitalisation of the construction industry offers more than just efficiency and transparency; it represents a paradigm shift in how businesses manage their financial transactions.
By automating and digitising transactions, businesses can significantly reduce the administrative overhead that often contributes to payment delays. It can also help address one of the primary obstacles to prompt payment: the cumbersome and often opaque nature of traditional invoicing and payment processes.
The digitalisation of payment processes not only enhances operational efficiency. It also instils a sense of accountability and precision that is essential for the construction industry's evolution in the next few years.
The year ahead: From now until April 2025
The path forward is fraught with resistance, arising from cultural inertia within established companies and the practical challenges of overhauling existing payment systems.
However, the ultimate goal transcends these immediate hurdles, aiming to cultivate a new ethos where prompt payment is not just a regulatory requirement but a cornerstone of business practice—a symbol of respect, partnership, and mutual growth. The construction industry stands at a crossroads, and its chosen direction will significantly impact its future landscape, reputation, and economic role.
As King said: "Will this ever be watertight? Will it be foolproof? No. But will it move us in the right direction? I hope so.”
You can watch the full webinar with Causeway’s Aaron Ferdinand and Philip King here.
For more information on Causeway’s budget and cost management solutions, get in touch with our team.
