The construction industry was hit hard by the pandemic, and, despite the hard work that businesses across the UK have put into their recovery and continued existence, it's clear that they are now facing another massive crisis, late payments.
Recent findings published by Lopay, a partner of the National Federation of Builders (NFB), highlight the sheer scale of the issue.
Their research shows that more than two-thirds (70%) of construction companies have been experiencing late payments from their customers over the last 12 months, leaving them financially unstable and unable to take on new projects, invest in new equipment, or pay for staff training.
The effects on these businesses are far-reaching and long-lasting. Late payments can lead to reduced profit margins, cash flow problems, and ultimately insolvency.
In this article, we'll be taking a detailed look at the issue of late payments, its catastrophic impact on the construction industry, and what builders can do to protect themselves from this growing problem.
The consistent danger of late payments
This can lead to higher costs, missed deadlines and an overall decrease in productivity as projects are delayed or cancelled. Data shows that 50% of builders have struggled to pay for materials due to late payments.
Furthermore, late payments can cripple the confidence of small businesses and contractors, making them less likely to take on new projects or risk their resources in an attempt to grow.
Around 30% of builders surveyed reported that they have been unable to take on new work due to late-paying clients, impeding their ability to grow.
Compounding this issue is that construction sector demand has fallen sharply over the last year, with these twin pressures resulting in 4,165 construction firms going out of business.
Data from Chaser's 2022 Late Payment Report supports these figures, showing the related costs of chasing late payments. Around 30% of all construction businesses spend more than seven hours a week chasing late payments.
The problem also seems to be worsening, with 40% of tradespeople reporting worsening the situation over the last five years.
The impact of late payments on mental health
Not only do late payments have a direct economic impact, but they can also detrimentally affect the mental health and well-being of those involved.
Research shows that almost three-quarters (82%) of builders are experiencing stress due to the problem, with one in five experiencing anxiety and one in seven experiencing depression.
The construction industry is particularly vulnerable to late payments due to the complexity of many projects and the fact that payments often occur after a large part of the work is completed.
This means that builders are potentially taking on huge risks as they complete each project without knowing whether or not they will be paid on time.
Builders have had to take extreme measures to chase late-paying customers, with 34% downing tools, refusing to complete a project until payment is made, and 28% being forced to threaten legal action.
Being forced into confrontation just to get paid what they are owed increased the mental strain on builders even further.
How can builders protect themselves against late payments?
The good news is that, despite the growing problem of late payments, builders can take a range of measures to protect themselves. To help you stay on top of your cash flow and protect yourself against the dangers of late payments, we recommend doing the following:
Concentrate on your credit control process
Effective credit control is the best defence against late payments. Starting with a comprehensive credit control policy is vital, as this will give you a clear framework for managing your customers and protecting yourself against late payments.
Ensuring all staff are aware of and stick to the policy is essential, ensuring everyone is on the same page regarding payments and extending credit.
Finally, regularly reviewing your credit control process will help you identify any improvement areas and ensure that your customers are paying on time.
Have a clearly worded contract in place
Ensuring that all contracts are clearly worded and include the payment terms is also essential. If the worst comes to the worst, having a signed contract with the details of your payment terms and deadlines makes taking a customer to court a much simpler process.
It's also essential to ensure that payment deadlines are realistic and that any changes to the terms of the contract are agreed in writing by both parties.
Ensure that your customer understands precisely when they need to pay you. Consider incentivising early payments by offering discounts for customers who pay on time and late payment charges for customers who are late.
Make sure you are communicating openly and regularly
Consistent communication with your customer is also essential. Remain professional at all times, and ensure you periodically remind customers of their payment deadlines.
Keep a record of all communications so that you have evidence of any discussions about payment should you need it.
If any problems arise, discuss them openly with your customer and try to reach an agreement on a realistic payment plan or deadline extension. Becoming overall aggressive or confrontational will only worsen the situation.
Ask for a deposit
Many smaller construction firms shy away from asking for a deposit before work begins, fearing scaring off potential customers.
However, a deposit is the best way to protect construction firms against late payments. By asking for a deposit when the contract is signed, you can guarantee that you will be paid at least part of your fee before starting work. This can also help reduce the upfront cost of paying for materials and labour.
You may also want to consider asking for periodic payments throughout the job, such as half or two-thirds of the total fee at specific milestones in the project. This will help ensure you receive regular payments and can help take the pressure off by placing less importance on one hugely important invoice.
Always follow up
Chasing customers for payment is not being rude. It's simply taking action to make sure that you get paid for the hard work you have done.
It's essential to be polite but firm when following up on payments, as this can help to encourage customers to pay on time.
Send reminders before the payment is due, and follow up with a phone call or email if you haven't heard back from them. Consider setting up automated payment reminders to make the process easier.
Make the best use of technology
Most smaller businesses don't have the resources to devote time and staff to chase up payments proactively, but technology can make the job much easier.
By automating specific tasks, such as setting up payment reminders and tracking invoices, you can save time and minimise the risk of late payments slipping through the cracks.
Call in the professionals
If all else fails and you cannot come to a reasonable agreement with your customer, it may be necessary to take legal action to recover what you are owed. Seek professional advice from an accredited debt collection agency if needed.
Not all debt collectors will ruin your good relationship with your customers. Reputable debt collectors will work to find a mutually beneficial solution that ensures you get paid, and your customer is happy.
Protecting yourself and your business from late payments
Protecting yourself against late payments is essential for the success of any construction business, especially in the current climate.
Following these simple steps will help ensure that you are always paid on time for the work that you have done. This will help relieve the stress of managing cash flow and help you stay on top of your finances.
By taking the time to review and strengthen your credit control process, having a clearly worded contract in place, communicating openly and regularly with customers, asking for deposits where possible, following up when needed, using technology to your advantage and calling in the professionals if necessary, you can help protect your business from the negative impacts of late payments.
For more tips on how to avoid late payments as a builder, check out the Chaser blog. Construction businesses across the globe use Chaser to automate their credit control and chase late payments, so they can focus on growing their business.