The construction industry is one of the pillars of any thriving economy, providing employment opportunities and contributing to economic growth. However, recent trends have shown a concerning connection between late payments and rising insolvencies within this sector.
In simple terms, late payment refers to when a client fails to pay their dues on time as agreed in the contract. While this may seem like a minor inconvenience, it can have serious consequences for construction companies, especially small and medium-sized enterprises (SMEs).
Late payments have been linked to a sharp increase in construction insolvencies, with reports showing that around 28% of all insolvencies in 2023 in the UK construction sector are due to late payments. This alarming trend has serious implications for both businesses and the economy as a whole.
Late payments have been linked to a sharp increase in construction insolvencies, with reports showing that around 28% of all insolvencies in 2023 in the UK construction sector are due to late payments.
The construction industry is responsible for building the infrastructure and facilities that are essential to our daily lives. From roads and bridges to homes and commercial buildings, the success of this sector directly impacts the functionality and growth of a society.
Therefore, when construction companies struggle due to late payments, it not only affects their own survival but also has a ripple effect on other industries and the economy at large. This includes delays in projects, job losses, and a decrease in overall economic activity.
In this blog, we will explore the reasons behind late payments in the construction industry and their impact on insolvencies. We will also discuss potential solutions and strategies for businesses to mitigate the risks associated with late payments.
Late payment crisis unveiled
According to a survey by Free Agent, small businesses in the UK are facing a late payment crisis. The survey indicated that just under half (43%) of all invoices sent by UK freelancers & small businesses in the past year were paid late. This is particularly concerning for the construction sector, which heavily relies on cash flow to fund projects and cover expenses.
In 2022, around 100 firms in the construction sector collapsed each week, with late payments being a major contributing factor. These failures have a domino effect on suppliers, subcontractors and employees, all of whom are dependent on the solvency of these companies.
Lynne Darcey Quigley, Founder & CEO of Darcey Quigley & Co, pointed out that:
“With estimated bad debt levels in the UK construction sector standing at an alarming £300 million, projections indicate this figure could rise to an eye-watering £1 billion by 2024. Now is the time to tackle this issue and take preventative action to avoid further financial damage. By investing in efficient credit management processes and timely debt collection, the construction sector can make strides towards a more prosperous future”.
Late payment is not just an inconvenience for construction businesses; it can lead to serious financial strains and even bankruptcy. The consequences of this issue raise important questions about the root causes and potential solutions. In the following sections, we will delve into these topics and provide insights on how to address this growing concern in the construction industry.
Insolvency surge in a decade
In the past decade, the construction industry has seen a significant increase in insolvencies. The construction sector was the biggest contributor to the UK's insolvency figures in 2023, with construction SMEs accounting for 17% of all insolvencies.
In the first quarter of 2022, the number of UK construction businesses that reported being in 'critical financial distress' was 51% higher than the same period in 2021. This trend highlights the urgent need for effective solutions to tackle late payments and prevent further insolvencies.
Owing to the cyclical nature of construction projects, cash flow is crucial for the survival of businesses in this sector. When payments are delayed or not received at all, it can lead to a precarious financial situation where companies struggle to pay their own suppliers and employees. If not addressed promptly, this can quickly spiral into insolvency.
In addition to delayed payments, there are other factors that contribute to the high rate of insolvencies in the construction industry. These include rising material costs, increasing competition, and a shortage of skilled labour. However, we cannot overlook the significant impact of late payments on this issue.
The impact of late payments and insolvencies in the construction industry goes beyond just businesses and their employees. It also has a ripple effect on the economy and society as a whole.
One major consequence of late payments is delays in construction projects, which can have far-reaching effects. For example, infrastructure projects that are crucial for economic growth and development may be put on hold, resulting in a slowdown of economic activity.
Furthermore, the domino effect of insolvencies can lead to job losses and financial strains on individuals and families who depend on these companies for employment. This, in turn, affects consumer spending and the overall economy.
Financial strain on construction contractors
One of the major challenges that construction businesses face in the UK is dealing with lengthy payment terms. According to a survey by Construction News, almost one-third of contractors wait up to 60 days for payments from clients. In addition, government data shows that payment times for the construction sector are around 28 days on average, higher than any other industry.
Such lengthy payment terms can create a significant strain on cash flow and hinder the growth of businesses in this sector. They also lead to a situation where companies are reliant on taking out loans and overdrafts to cover expenses while waiting for payment, which in turn increases their financial risk and vulnerability.
Apart from the direct impact on businesses, lengthy payment terms also create a culture of late payments throughout the supply chain. If clients can delay payments to contractors, then contractors may take longer to pay their subcontractors and suppliers, leading to a cash flow crisis for these smaller businesses as well.
Underpaid invoices and economic aftermath
In addition to delayed payments and lengthy payment terms, underpaid invoices are also a major issue in the construction industry. A survey conducted by Construction News showed that half of the respondents in the construction industry reported underpaid invoices, with an average of 15% less than what was initially invoiced.
Underpaid invoices not only affect the immediate cash flow of a business but also create a financial strain on future projects. This can lead to a situation where businesses have to cut costs and make compromises, which could ultimately impact the quality of their work and reputation in the industry.
Furthermore, underpaid invoices can also lead to disputes and strained relationships between clients and contractors, adding unnecessary stress and delays to projects. This further highlights the need for prompt payments in the construction sector.
Technology as a lifeline
As Lynne Darcey Quigley notes, a proactive approach and the right technology offer a solution to the problem of late payments.
“UK businesses need to be proactive in their approach to cash flow and financial processes – if they fail to adapt, the number of insolvent construction businesses will continue to rise. It is essential that companies put a robust credit control process in place and recognise any signs of a potential client becoming insolvent, to ensure that the business is paid on time. Taking these steps now will provide businesses with a secure economic future and protect them from the devastating effects of insolvency”.
Tools like Chaser can help construction businesses streamline their credit control processes by automating tasks like invoice chasing, reducing the time and effort spent on this task.
Some of the benefits of using Chaser include:
Automated email chasing
With Chaser, businesses can set up automatic email and SMS payment reminders to be sent to clients when invoices are due. This not only saves time but also ensures that the client is reminded of their payment obligations in a timely manner.
Customizable templates
Chaser offers customizable email templates, allowing businesses to personalize their payment reminders and maintain professional communication with their clients.
Real-time tracking and reporting
With Chaser, businesses can track the status of their invoices in real time and generate reports to gain insights into their payment processes. This helps them identify any delays or issues early on and address them promptly.
Integration with popular accounting software
Chaser integrates with popular accounting software like Xero and QuickBooks, making it easier for businesses to manage their invoicing and payment processes in one place. Because it's easier for businesses to keep track of their finances, it can also help reduce the risk of underpaid or delayed invoices.
Credit checking capabilities
Chaser also offers credit checking capabilities, allowing businesses to assess the financial stability of their clients and make informed decisions about extending credit terms. By allowing businesses to identify potential risks, this feature can help mitigate the effects of late payments and insolvencies.
By implementing the right technology, construction companies can improve their cash flow and mitigate the risks associated with late payments. This will not only benefit their own financial stability but also contribute to a more sustainable and thriving industry as a whole.
Overcoming the challenge of late payments
Late payments and lengthy payment terms are significant challenges faced by construction companies. However, by taking a proactive approach to credit control and utilizing technology, businesses can improve their financial stability and mitigate risks associated with delayed or underpaid invoices.
This will not only benefit individual businesses but also contribute to a healthier and more resilient construction industry. As the survey findings have shown, late payments can have a domino effect on the economy and society as a whole. By granting timely payments to contractors and subcontractors, clients can ensure that projects are delivered on time and within budget. This, in turn, leads to a more efficient and prosperous construction industry.
Chaser can offer a promising solution to the problem of late payments in the construction industry. By embracing this tools, businesses can protect themselves against financial risks and contribute to a more sustainable business environment for all parties involved.
To find out more about how Chaser can help your construction business overcome the challenges of late payments, book a demo or start your no-obligation 14-day free trial today.
