Late payment of invoices is a major problem for the construction industry. Successive governments have tried to tackle this in a variety of ways, the latest of which is the planned introduction of regulations this year under the Small Business, Enterprise and Employment Act 2015 relating to payment practices.
Poor payment practices have long been a headache for the industry, with medium and smaller-sized businesses traditionally bearing the brunt of the pain. Delay in payment of invoices typically creates pressure on the liquidity of smaller companies, compromising their ability to grow and increase productivity. Recent reports suggest that as many as one in four SMEs are at risk of collapse due to late payment.
Numerous efforts, both legislative and industry led, have been made over the years to encourage prompt payment. New efforts continue to be made, including Build UK’s plans to benchmark its members on their payment terms by collating publicly available information and publishing it to compare performance.
Sadly, the latest survey data indicates that problem payment practices still persist, with delays of more than 100 days not being uncommon. Clearly, despite best efforts, a workable solution to late payment has not yet been found.
The new regulations are an attempt to force large companies to address late payment. The intent is to increase transparency, so that those contracting in with such large companies can clearly assess the risks of late payment that they might encounter.
Who do the new regulations apply to?
The new regulations derive from Section 3 of the Small Business, Enterprise and Employment Act 2015, which gives the secretary of state the power to introduce regulations to make certain companies report on their payment practices and policies. Draft regulations were issued for consultation in 2014. No consultation response nor further drafts have been issued since then, so it remains to be seen how far the 2016 regulations will differ from the 2014 draft.
However, working on the basis that the 2016 regulations will be very similar to the 2014 draft, it is anticipated that the new regulations will apply to “large” companies as defined under the Companies Act 2006: those with a turnover of over £36m and more than 250 employees. This definition includes large private companies in the UK, large quoted companies and large limited liability partnerships.
The new regulations will apply to payment policies in respect of contracts for goods, services and intangible assets, including intellectual property, where the period for payment ends in the organisation’s accounting period. This means that most, if not all building contracts, supply contracts and construction consultancy appointments made by affected companies will be covered.
What if the new regulations apply?
Companies caught by the regulations will need to disclose a range of information relating to their payment policies and practice on a biannual basis. Examples include payment policies, the proportion of invoices not paid within their period for payment and the proportion of invoices paid in 30 days or less, between 31-60 days and over 60 days, payment codes of conduct, details of late payment disputes and payments owed, and the amount of late payment interest they owe and have paid during the reporting period.
Companies may also be required to report on financial incentives/main contractor discounts required, “opportunities” for supply chain finance and prompt payment discounts and retention history and policy.
While the provision of this information may constitute an administrative headache for some, mere disclosure is unlikely in itself to force adherence to good payment practice. What will promote adherence is the transparent nature of publication. Large firms will have to publish the relevant information to a central digital location which the government will make publicly available. The importance of reputation and brand may ultimately be the main incentive for improving payment practices.
However, consequences for poor payment practices will not only be limited to public shaming. The new regulations go a step further and provide that “persons”, such as directors, who breach the regulations (for example, if they fail to report accurately or on time), may be personally liable and face a criminal conviction, punishable by a fine.
Key steps to take
It remains to be seen whether the new regulations will make a significant contribution to addressing poor payment practices in the construction industry.While we do not know how closely the 2016 regulations will mirror the 2014 draft regulations, what is clear is that they will promote good payment practice.
So, in preparation, companies caught by the new regulations would do well to consider taking the following steps:
- keep clear records of payment policies;
- put in place new processes to monitor payment performance efficiently;
- ensure that all staff in charge of payments are aware of the new changes coming into force; and
- keep an eye out for the final version of the new regulations and any accompanying guidance.
Helena Savva is a trainee with the Construction, Engineering & Procurement team and co-authored this article with Marc Hanson.