Delayed payments in construction: the ramifications

How does the construction industry solve the problem of delayed payments and put a stop to rising insolvency rates? For a very long time, late payments have been normalised by the industry, putting the financial viability of firms at risk, especially for construction firms working at a smaller scale, who are crucial to the successful running of the industry. 

Indeed, the number of construction firms facing insolvency hit the highest level in a decade in the second quarter of 2023, with 1,176 firms going bust. Ultimately, this statistic highlights how it is more important than ever that payments are made in a timely manner so that firms don’t find themselves subject to an unwelcome visit from the administrator.

Difficult dealings

The multiple levels at which payment applications have to be reviewed, ranging from suppliers to subcontractors, to main contractors and the employer, often leave firms, especially smaller companies who typically have to carry the initial burden of material and labour costs, in a dangerous waiting game as they watch payments slowly slide up the supply chain and the costs only trickle down. 

However, while the right to ask the paying party whether they have the funds to finance a construction project at its outset could alleviate this waiting game, the option of paying upfront, without the correct securities in place, can unfortunately still leave parties at risk. This is because payment can be made for parties only to then find that work is severely delayed, second-rate, or in the worst scenario, that no work has occurred at all.

A perplexing predicament  

For the last 30 years, widespread industry practice and contract terms have allowed for payments to be made within a 30-day period, and in more instances than not, this period is extended. However, factors such as rising interest rates and high inflation putting increased pressure on the working capital of firms, are breaking this already broken system. 

While legislation, namely adjudication, was implemented to aid with cash flow, missed payments as well as confusion around who is responsible for covering rising material and labour costs, are still leaving firms in serious danger of insolvency. As such, it is time that parties stop finding ways to evade restrictions and treating late payment applications as merely being an application for the following month, or the month after that. 

Tackling the issue  

The problem of delayed payment, and the disputes that arise as a consequence, is a serious issue for the construction industry. Indeed, the government’s announcement of a Payment and Cash Flow review, late last year, to ensure best practice in combatting late payments for small businesses, arguably confirms the scale of the issue.  

While the industry awaits the outcome of the government’s review later this year, steps need to be taken now to protect both big and small construction firms against late payments. The industry can no longer rely on the legal route of adjudication as this is often a lengthy and expensive process. Instead, the sector must work hard to encourage a working culture of collaboration and open conversation, especially at the start of a project when drafting each party’s contractual responsibilities. 

Additionally, is it possible that parties could subject more complex parts of a contractual structure to a different inspection and approval regime, even agreeing on alternative payment periods?  

Ultimately, it is important that more is done at the beginning of a construction project to consider the risks involved with upfront payments as well as deciding who should take responsibility for the costs associated with a project. Only then can the industry begin to tackle the issue and financial ramifications of delayed payment in the construction industry.

Bill Barton is a director of Barton Legal