Could rising sub-contractor powers spell the end of late payment problems?

Author: Tom Crane – Glenigan Economist (@TC_Glenigan)

As the construction industry enters a period of prolonged and fast paced growth, issues of costs, capacity and cash flow are coming to the fore.

The outlook is undoubtedly brighter, with the industry experiencing growth in construction output during 2013 and Glenigan forecasting a 6% increase in new project starts in 2014 – the fastest rise since 2007. Indeed, the 2013 Q4 Construction Trade Survey, published by the Construction Products Association (CPA), reported further growth in output and new orders, though at a slower rate than Q3.

However building contractors continue to see tough conditions, with the majority of companies reporting profit margins, already wafer thin from competitive pricing during the downturn, being squeezed further during 2013.

Tender prices rose for the second consecutive quarter in the final part of 2013; however the rises did not keep pace with material and labour cost inflation. These cost pressures will continue to build, with 80% of construction product manufacturers expecting their costs to increase during 2014, according to the CPA’s Q4 State of Trade Survey. More than two thirds of respondents reported that costs rose during the final quarter of 2013, with pressure from rising energy prices, raw material prices and wages.

According to the National Specialist Contractors’ Council’s (NSCC) State of Trade Report for Q4, construction firms rank late payment as one of the three most important factors affecting their business, with just 5% of respondents reporting payment within 30 days. The report found 76% received payment between 30 and 60 days and 19% took payment between 60 and 90 days.

This has been reflected in other ways, with the number of complaints made to the UK Government’s mystery shopper hotline rising in the final quarter of 2013 as sub-contractors voiced concerns about late payment on Ministry of Defence and Ministry of Justice works.

The government recently held a consultation on late payment, with Prime Minister David Cameron saying beforehand: “It’s not right that suppliers are not getting paid on time for the work they do and the services they provide and I know that late payment can have devastating effects on our small and medium sized businesses.” There have also been calls from trade contractors for a high level summit on the issue.

The current cash flow pressures are not restricted to tier two and three firms, with major contractors continuing to undertake work at low margins. Though there are signs that the upturn is shifting the balance in the contractor-client relationship within high demand markets such as London commercial construction, this will develop more slowly outside the capital and in sectors not enjoying the same rapid growth. There is also recognition of the issue of late payment, with some major contractors introducing finance options or early payment schemes to support their supply chains.

However, the balance of power is shifting towards sub-contractors. With the industry losing up to 20% of its capacity between 2008 and 2012, the recent upturn in growth has placed those sub-contractors left standing in high demand. As work volumes rise, they are likely to grow increasingly confident to insist on prompt payment terms.

Firms are set to face a year of cash flow pressures, with the dangerous cocktail of falling margins, rising costs and growth in workloads leaving them vulnerable to delayed payments. But for those who hang in there, 2014 could be the perfect time to push for an end to late and delayed payment, with the goal of making 30-day payment the widely accepted, and adhered to, norm.

Is your firm affected by late payment problems? What do you think needs to be done to solve the issue? Get in touch with your views on Glenigan’s social media channels via the icons at the top of the screen.