Roofing construction

Managing late payments in the construction industry

25 January 2021
Late payments are, unfortunately, a regular occurrence in the construction industry, especially for SME’s, and is believed to be one of the main risks to long-term sustainability in the sector. According to industry research, the average construction firm will have to wait 107 days for payment, for a variety of reasons.
Take a look at some of our guidance on how to manage late payments below.

Businesses rely on their income to remain viable, so here are some of the issues that a business may face if payments are delayed or withheld.

Loss of employees

Delayed or withheld payments can lead to employees not getting paid on time, or at all. This could lead to businesses struggling to keep staff employed, risking employees becoming unemployed.

Reputational damage

If you have not received a payment and decide to stop or postpone work, you can suffer from a damaged reputation, even though the original cause of the problem isn’t your fault.

Disruption to supply chain

If you have a delay in receiving income, you may not have the funding you need to continue to source the products you need from your supply chain.

Limits on the number of contracts you can accept

A lack of income could mean that you don’t have resources to take on more jobs. This will restrict your ability to develop your business.

Dissolution of your business

An extreme consequence of late payments, but something that could be a reality for many businesses. Late or withheld payments can cause businesses to lose the ability to pay staff, suppliers or outstanding debts, leading to financial difficulties and maybe even the termination of your business.

The UK government has understood that late payments are a very real concern, not just in the construction sector, and has put laws in place, some of which are directly targeted at the construction industry, to help businesses manage any late payments from customers.

Part II of the Housing Grants, Construction and Regeneration Act 1996

This law is directly targeted towards the construction industry and was amended by the Local Democracy, Economic Development and Construction Act of 2009.

This act clarifies the payment rules when it comes to the construction industry, with the 2009 amendment expanding rights for contractors to suspend performance for non-payments, abolishing conditional payment clauses and introduced a requirement for submitting paper notices.

For more information, see the wording of Part II of the Housing Grants, Construction and Regeneration Act 1996   legislation.

Late Payment of Commercial Debts (Interest) Act 1998

This act outlines how much interest a business can charge on top of late payment. This is set at 8% plus the base level set out by the Bank of England.

For more information, see the wording of Late Payment of Commercial Debts (Interest) Act 1998 legislation.

Late Payment of Commercial Debts Regulations 2013

This regulation outlines that businesses should have a 60 day payment period limit for businesses and a 30 day payment period limit for public authorities.

For more information, see the wording Late Payment of Commercial Debts Regulations 2013 legislation.

Prompt Payment Policy

Not legislation as such, but a code that most businesses will adhere to.

The code is administered by the Chartered Institute of Credit Management and aims to standardise practices for businesses and their supply chains. Businesses who sign up to observe the code must behave as follows:

  • Pay suppliers within 30 days, with a maximum limit of 60 days. Businesses must pay 95% of the undisputed invoices within the 60 day period unless there are exceptional circumstances.
  • Give clear payment guidance to suppliers, which includes details on how to deal with complaints and disputes.
  • Share good payment practice with peers in the industry, encouraging them to also follow the code.

For more information, see the Prompt Payment Policy website.

Construction Supply Chain Payment Charter

This charter is voluntary and is managed by the Construction Leadership Council. To be able to apply to be part of the charter, businesses must have already signed the Prompt Payment Policy, and by signing the Construction Supply Chain Payment Charter, are expected to follow 11 commitments. The following 6 commitments are the most important:

  1. A business will make full payment outlined in the contract for work that is carried out or where supplies are provided.
  2. A business will not deliberately delay or withhold payment unreasonably.
  3. Businesses are required to make a full payment no later than 30 days from the end of the calendar month in which work was carried out or supplies provided.
  4. A business should issue a ‘pay less’ notice at the earliest opportunity, and no less than 7 days prior to the final date.
  5. Businesses should have processes to ensure that any changes to a contract can be completed fairly and in a timely manner.
  6. Businesses should act transparently and honestly when dealing with disputes.

These pieces of legislation and charters are designed so that businesses know how they should work when arranging payment for work carried out or supplies provided. This in turn requires a commitment by the businesses themselves to support a culture of fair and prompt payments.

For more information, see the Construction Supply Chain Payment Charter resource.

According to research undertaken by Euler Hermes, a credit insurance company, the construction industry saw a 27% increase in overdue payments in recent years.

As a business, subcontractor or freelancer in the construction business, one late payment can disrupt your whole business, so it is important to make sure you are getting paid when you need to be. Take a look at some of the ways that you can make sure that your business is protected from late payments.

Compliance with codes and charters

Investigate whether or not your customer or client has signed one of the codes or charters outlined in the section above.

If they have signed them, you can be confident that they know the problems that businesses can experience from late payments, and will pay for your services or supplies in a timely manner.

Establish a client’s creditworthiness

Do some background research into a potential client to make sure that they have been able to meet payment deadlines in the past.

You can check Companies House to see the basic financial status of a business that you are working with. Alternatively, there are businesses that you can use that can carry out these background checks for you.

Outline finances in a contract

By outlining terms in every contract that you sign, you outline payment expectations from the very start of the relationship. This ensures that both parties know where they stand when it comes to payment so there can be no disputes in the future.

Understand the payment terms of a contract

It is prudent to ensure that you understand all of the clauses in a contract before you sign it, paying particular attention to payment information.

Calculate the right price

To avoid disputes over price, whether this is your clients or customers thinking you’re charging too much or you under-price yourself, make sure that you have accurately calculated the price of your services or supplies in the contract.

Be strict with negotiations

When negotiating a contract, have an expectation in mind when it comes to having your fee paid and deviate from this as little as possible. If your terms are reasonable your customer or client should have no issue meeting them.

Don’t forget your rights

Remember that the government will allow you to charge 8% of the base rate for late payments. Don’t be afraid to use this if your customer or client is unreasonably late or withholding payment.

Take action on overdue payments

Once payment has become overdue, act immediately to remind your customer or client that they need to pay the money owed.

Don’t jump to conclusions and create a dispute immediately, as your customer or client could be experiencing cash flow issues due to late payments. Be understanding with reasonable situations to make sure that the relationship stays positive.

Don’t be afraid of legal action

If there are no reasonable circumstances for late payment and your customer or client is still not paying, don’t be afraid to take legal action to make sure you’re receiving what you are owed.

Review your finances regularly

Regularly review your finances and records so that you know when you are due payments from customers or clients.

This will also help you manage your cash flow so that your business isn’t hit too hard by late payments.

Source: Zywave Inc. - Construction Risk Insights: Dealing with Late Payments

Whatever type of work you do as a contractor, you need to ensure that you are protected should the worst happen. There will also be different insurance needs for different types of business, who might need employers' liability insurance by law, or commercial vehicle insurance to protect their assets.

At Premierline, we specialise in arranging insurance for contractors, freelancers insurance and consultants insurance so call us to speak to one of our insurance advisors today.

It is important to make sure that you have the right insurance in place to protect the business that you have built. Every business is different and has its own business insurance needs, which is why we work with some of the UK’s most well-known insurers to ensure that you are getting the right insurance cover for your business.
The information and tools contained in this guide are of a general informational nature and should not be relied upon as being suitable for any specific set of circumstances. We have used reasonable endeavours to ensure the accuracy and completeness of the contents but the information and tools do not constitute professional advice and must not be relied upon as such. To the extent permitted by law, we do not accept responsibility for any loss which may arise from reliance on the information or tools in our Insight Hub.