Paul Reeve, Director of Business Services at the Electrical Contractors’ Association (ECA), discusses the difficulties many small- and medium-sized businesses face getting paid and offers some tips to help ease the process.
Put bluntly, getting paid is a deﬁning concern for contractors. Small- and medium-sized businesses are owed over £30 billion by larger companies up the supply chain, according to recent government ﬁgures, and recent surveys show that around 85% of small businesses have experienced late payment. Over recent years, there have been a series of fair payment initiatives, including the construction ‘Fair Payment Charter’, but these have failed to bring about major changes.
In addition, issues such as ‘cash retentions’ remain, where those further up the supply chain – which can include public bodies – sometimes withhold up to 10% of money due to smaller contractors, for as long as two years. If an ‘upstream’ commercial ﬁrm goes bankrupt before the retention is released, the money owed doesn’t reach the smaller contractor.
“Small- and medium-sized businesses are owed over £30 billion by larger companies up the supply chain, according to recent government ﬁgures, and recent surveys show that around 85% of small businesses have experienced late payment.”
So what can be done to help ensure you get paid in full, and on time? Here are five basic steps to the perennial challenge of getting paid:
1. Making your offer…
Matching the client’s requirements with a sound, well-reasoned and clear offer can avoid many of the common causes of disputes that lead to non-payment. It is important to establish clearly what the client wants, in respect to the scope of the works, the quality required, the extent of the service required and the conditions the customer will insist upon, before making an offer.
2. Know what it says in the ‘Construction Act’
For commercial and industrial work, the payment terms of any regulated contract, whether spoken or written, are subject to a series of legal requirements under the ‘Construction Act’. Payment notices must be served, in a suitable format and on a timely basis. These are laid down in the Act but they can be explained in plain English by your trade association.
Contracts will often state, as a strict requirement to getting paid, how the claim for payment must be made. Each contract may have different requirements and it is important to ensure the party who received your invoice knows and agrees how it will be presented. Keep it simple is a good approach to adopt, though you may need professional help to clarify some aspects of VAT.
4. Compensation for late payment
Interest and compensation for late payment are available, by law or by contract. The Late Payment of Commercial Debts Regulations states what compensation and interest rates are chargeable. The courts may say that a contract interest rate of below 4% is ‘insufficient’ and replace it with 8% over the Bank of England’s Base Rate.
5. Debt recovery
Various debt recovery companies can offer a cost-effective way to show unreasonable clients that once a bill is due, it must be settled. Apply the late payment provisions covered by either law or contract and then warn the client that the debt will be placed into the hands of specialist third party debt collectors.
If you want to find out more about the above, or need further guidance, we strongly recommend you speak with a commercial or legal adviser, or to your trade association.
The future for fair payment…
Since last year’s election, the government has been focusing on ‘improving productivity’, but the ECA has warned that boosting productivity – which will require supply chain confidence and a lot more besides – simply won’t happen if contractors are dogged by poor payment practice.
In 2015, legal rules under the Public Contracts Regulations were introduced to require public sector bodies – such as local councils and fire authorities – to implement fair payment within 30 days – right through their construction supply chain. The ECA is monitoring this closely, with a view to helping contractors to be paid on time. In addition, from next April, large companies will – by law – also have to report regularly and publicly about their payment terms and how often these are met, which should help to bring about much needed cultural change within many larger companies.
For now, getting paid fairly can still be a challenge, but by following the ﬁve basic steps above, you can minimise the risk of not being paid in full, and on time, for your work.