Late payers can expect ‘payback’, warns
construction chief

Main contractors who have been delaying paying their suppliers through the recession could soon be facing ‘payback’ time from companies they nearly put out of business, warns regional construction and engineering firm Stepnell.

With the construction industry showing signs of coming out of recession, Stepnell says that the sector is already experiencing shortages in quality trades in some parts of the country, and suppliers will choose to work for those who pay promptly.

“Subcontractors and key suppliers have been afraid to insist on their larger clients paying them within 30 days for fear of losing future project work. But now the tables are turning,” explains Mark Wakeford. “The industry’s capacity is only two thirds of what it was five years ago. Those still standing are in demand and in a stronger position to set their own payment terms and choose who they want to work with.”

The warning comes when 80 per cent of invoices paid by central government to main contractors are settled within five days on the condition that that their subcontractors and suppliers are paid within 30 days.

Zombie firms at risk

Mark Wakeford believes that while some large main contractors are sitting on cash, many are effectively ‘zombie companies’ - firms on the edge of insolvency who are just managing to survive. It’s these companies he thinks will struggle to meet 30 day payment terms.

One in 10 of the UK’s 2.5 million businesses is currently classified as a zombie company with the construction sector one of the worst affected with an estimated 26,000 companies on the brink of insolvency.

“The worry is over contractors’ ability to bring forward their payment terms to 30 days from 60 or in some cases, more than 90 days. A contractor paying suppliers and subcontractors in 60 days and trying to respond to market pressures to pay in 30 days may need to find around seven per cent of its turnover in cash to meet these faster payment terms. Even if spread over three years this equates to over two per cent of turnover annually for those three years,” explains Mark Wakeford.

He believes that the biggest risks will be to clients whose main or tier one contractor cannot attract suppliers into the delivery team and to the contractor’s suppliers if it finally runs out of cash.

“This will only compound problems in trading out of a recession when turnover grows and cash is needed to meet a greater working capital requirement and investment in plant, skills and corporate infrastructure,” says Mark Wakeford.

He urges construction clients to insist on project bank accounts for larger schemes to help protect their investments and suppliers to charge more for the risks of working for payment terms over 30 days.

“During the recession many large contractors have got away with paying their suppliers late or extending payment terms because they have had the power to do so. That power is now shifting which could be the final kiss of death for zombie firms.”

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