Construction News reveals the payment performance of the largest contractors in the UK, and James Wilmore examines how well payment reporting rules are working
Insolvencies in construction are on the rise. In recent months, administrators have highlighted cashflow issues as being central to the demise of some firms. Concerns over the length of time it takes for contractors to pay their supply chains have dogged the industry for years, prompting the government to introduce a legal requirement for larger firms to publish their payment times every six months.
According to ministers, this was a means to create greater transparency on payment performance, help small businesses understand the picture among large contractors, and put pressure on bigger firms to improve their practices.
Nearly five years after the duty came into effect, Construction News explores whether the system is transparent and asks to what extent it is painting a true picture of performance – and, crucially, whether it has driven down the amount of time firms take to pay suppliers.
The latest scores
In March 2019, when CN first analysed the payment times of the UK’s 100 biggest contractors, the median average time it was taking to settle an invoice was 43 days. The percentage of invoices not paid to terms across our top 100 averaged 28 per cent. Our latest analysis has found the average wait has shortened to 39.5 days, with 12 per cent not paid to terms.
Larger firms are generally quicker payers than smaller firms, with those boasting a turnover of £1bn or more – the top 15 biggest contractors – averaging payment times of 32.7 days. This compares with 43.8 days for firms with a turnover under £200m (position 70 and below on the table).
Another attempt to improve payment times was the introduction of the Prompt Payment Code. The code, in operation since 2008, is a voluntary initiative whereby companies commit to paying their suppliers within an agreed timeframe. In 2019, the body that was then administrating the scheme – the Chartered Institute of Credit Management – began publicly naming firms that did not meet its terms, which at the time was to pay 95 per cent of invoices within 60 days.
The UK’s biggest contractor, Balfour Beatty, was booted off the initiative in 2019 and reinstated in early 2020. As of mid-2021, it took 38 days on average to pay – a slight improvement on its previous performance of 40 days, recorded six months earlier. Some 58 per cent of invoices were paid within 30 days in the six months to the end of June 2021. The firm also improved on the proportion of invoices paid to terms.
In its most recent annual report, explaining its record on settling invoices, the firm said: “Whilst Balfour Beatty remains focused on measures which ensure continued improvement in its payment performance, it operates in a sector where supply chains and contractual terms are complex, and prompt payment is often materially impacted by resolution of disputes and alignment to agreed contractual processes.”
Kier, the second-biggest contractor, which was also thrown off the Prompt Payment Code in 2019 and subsequently reinstated, reported taking an average of 31 days in the six months to the end of June. In its last annual report, the company said: “We are committed to further improvements in our payment practices and continue to work with both customers and suppliers to achieve this. We are fully committed to complying with the 30-day payment requirements for small and medium-sized firms.”
The worst performers that complied with their duty to provide figures were Forth Holdings at 71 days, TClarke at 69 days and NMCN at 66 days.
Forth Holdings did not respond to CN’s request for comment. NMCN, which filed for administration in October, saw its performance deteriorate from 56 days on average to 66 days during the period in which the doomed business failed to get its accounts signed off.
M&E specialist TClarke took an average of 69 days to pay its supply chains in the six months to the end of June 2021. Only 10 per cent of its invoices were paid within 30 days. And 40 per cent of invoices were not paid to agreed terms. A company spokesperson said in a statement that the firm “works closely with all of our partners throughout the supply chain, with whom we have forged many excellent, long-lasting relationships”.
They added: “The group works with numerous companies across different projects, therefore we are managing our credit and debit balances on an ongoing basis with a significant number of established partners. Our standard payment terms remain consistent and fall at the end of a calendar month. We manage our finances carefully and prudently and we work hard to treat all of our partners fairly and consistently.”
The best performers were Amey, which reported that, in the six months to the end of June, it was taking an average of just 12 days to pay its supply chain – a major improvement on its previously recorded performance, which was 34 days. Just behind was Enerveo, formerly called SSE Contracting, which took 15 days; Ferrovial, at 21 days; and Stanmore, which took 22 days.
Meeting the criteria and the method behind the numbers
Firms that meet at least two of the following criteria in their last two accounting years are required to file a Payment Practice Report:
- Turnover of £36m and above;
- Gross assets of £18m and above;
- More than 250 employees.
Companies subject to the rules must report twice per financial year, with the first report covering the first six months and the second spanning the remainder of the financial year.
Data used in this edition was collected for companies that both submitted payment information and appeared in the latest CN100 ranking of the UK’s largest contractors. The most recent six-month filing (up to and including 3 November 2021) and the equivalent figures for the same period six months earlier were used to assess the progress of every firm on the list.
Some question how reliable the payment-reporting system is, however. MV Kelly, according to its latest reporting, takes an average of 65 days to pay suppliers, placing it as the joint-fourth-worst in the table, according to our analysis. However, only 8 per cent of invoices were not paid to terms. A spokesperson for the company said in a statement that it believes the published statistics “do not accurately reflect our stance on payment practices”.
It added: “Our longer payment terms are contractually agreed with larger corporations who constitute much of the volume of invoices processed. Furthermore, our standard terms are calculated based on the last day of the month of the invoice date; many companies within our industry will receive invoices end of month whilst we receive invoices throughout the month. This would result in comparatively worse stats despite offering the same terms.”
“The fact we’re still talking about this problem after many years is tiresome”
Rudi Klein, barrister and industry commentator
MV Kelly concluded by saying that it was “aware of the needs of smaller businesses within the industry” and took steps to support its smaller suppliers. As an example, it said that small businesses and subcontractors with high labour costs are paid on “significantly faster terms” and, during the COVID-19 pandemic, it said it has provided “additional payments” to support businesses in need.
Rob Driscoll, director of legal and business at the Electrical Contractors Association, points out that the system works through an ‘honesty box’ approach, whereby companies report their own times. “The payment data doesn’t give a true picture if it only measures the volume of invoices paid and not the value,” he says. “Paying parties can hide high-value supply chain payments amongst lots of low-value purchase-ledger payments and look good. The data doesn’t really differentiate between who is good and who is bad, until this is fixed.”
Even allowing for such apparent unreliability, the figures suggest that payment times are still way off the 30-day target set by the government. In July 2021, new rules came into force, strengthening this ambition: large firms signed up to the Prompt Payment Code will have to pay 95 per cent of invoices from small firms within 30 days, or risk being suspended from the initiative.
Are the measures working?
So are government’s efforts having any impact? Opinion is divided.
Ann Bentley, a global board director at Rider Levett Bucknall and member of the Construction Leadership Council, believes that a government push last year, designed to ensure payments were made as firms got to grips with the impact of the pandemic, helped things. She also suggests there has been a shift in attitude among some tier ones. “I think what I call ‘the good contractors’ have recognised the benefits that they get from having a liquid supply chain, rather than one that’s always tight for cash,” she says.
When it comes to cashflow, Bentley suggests that, for smaller firms, it is not necessarily about the number of days they have to wait, but knowing they will get paid at the time they are told by a bigger company. “If you know the money is coming, it makes borrowing easier – it makes cashflow management easier,” she says.
Bentley believes the Prompt Payment Code has brought about some improvement: “Some of the big clients are holding the tier one and tier twos accountable – it becomes a KPI [key performance indicator],” she says.
National Federation of Builders CEO Richard Beresford feels the industry is “treading water”.
“I don’t think the situation is getting any worse, but it’s certainly not getting any better,” he says, and suggests that much of the responsibility lies with clients. “If the clients aren’t paying within 60 days, you can’t expect the contractors to be paying their subcontractors within 30 days as well.”
Others, though, remain convinced that the problem lies at the top of the supply chain. Rudi Klein, a barrister and industry commentator, blames the undercapitalisation of tier ones. “The largest companies are not geared up to pay their supply chain,” he says. “They have to wait to get paid to pay their suppliers.”
He also raises the long-running issue of retentions, with many firms waiting three to four years to get retentions money released, he says.
Klein is worried about the impact on smaller firms, particularly in the current climate. “In my 30 years I’ve never known a time like this, when the cost base has ratcheted up as much,” he says. “SMEs are having to bear the cost of price rises, delays, a hike in professional indemnity, reverse-charge VAT. My concern is, as we go into , the insolvency rate will ratchet up.”
Debbie Abrahams, a Labour MP who has campaigned around payment, says the issue remains “massive”. She adds: “Tier ones are under a lot of stress. There’s another Carillion [which collapsed in 2018] just around the corner and the government has done nothing about it. COVID and Brexit is putting additional pressure on cashflow, along with late payments.”
Best 5 by average days to pay:
- 12 days Amey
- 15 days Enerveo
- 21 days Ferrovial
- 22 days Stanmore
- 24 days Vinci; Sir Robert McAlpine
Worst 5 by average days to pay:
- 71 days Forth Holdings
- 69 days TClarke
- 66 days NMCN
- 65 days Briggs & Forester
- 65 days MV Kelly
Still talking about it
Abrahams introduced a small-business bill in 2019 to tackle the issue of late payment. Among its recommendations were the introduction of 30-day payment times and project bank accounts – ring-fenced accounts through which a client pays the whole supply chain at once – on large construction projects. It did not pass into law.
However, project bank accounts are becoming more widely adopted. Bentley points out that they are being used by HS2, Network Rail and all devolved authorities. But Abrahams believes the system should be used across public projects. “They should be the exception when not used,” she says.
Beresford believes there could come a time when more action is needed: “The government is certainly listening and looking. And if it comes to a time where we’re knocking our head against a brick wall and there’s no significant improvement in the data over the next 12 months, then possibly the government does need to step in.”
Klein is more forthright, having witnessed many years of similar initiatives. “The fact we’re still talking about this problem after many years is just simply getting tiresome,” he says. “We’ve had enough of reporting of the problem. Codes don’t make things happen. It has to be implementation, enforcement. And particularly at this critical time, we need enforcement more than ever otherwise the industry will lose more reputable businesses.”
He suggests that in the past 15 years there have been 25 reports, initiatives and charters on payment in the construction sector. “None of them have had a lasting impact in terms of eradicating the problem,” Klein says. “The best type of enforcement comes through legislation.”
Next April, the government is introducing a new standard that means contractors bidding for public work will have to pay 90 per cent of invoices within 60 days, or risk being excluded from contracts.
The Department for Business, Energy and Industrial Strategy, which operates the payment-reporting system, has also opened a consultation on how it has performed so far. The department was approached to comment on the issues raised in this article, but did not do so.
Its consultation concludes by asking whether the regulations requiring payment reporting should remain in place. The industry will be watching closely to see what Whitehall does with the answers.
All data as per payment practice reports published up to 3 November
Data collected by Ian Weinfass, David Price, Tiya Thomas-Alexander and Joshua Stein