How Construction Industry Payment Terms Affect Social Value and Why We Have to Change Right Now

As we march into winter, the summer holidays may seem like an ever more distant memory. However, something that happened during my family break has stuck with me, and it illustrates the tricky connection between construction industry payment terms and social value. We need to change the way we work, and we need to start now. 

Dounreay Nuclear Plant Decommissioning

Over the school holidays, I toured Scotland with my wife and our kids. Eventually we reached the very north of the mainland and indulged in the usual tourist activities; having our photo taken under the sign at John O’Groats, pottering around a castle or two and paying a visit to the Dounreay nuclear plant. Well, perhaps they’re not ALL on the traditional sightseeing schedule.

This was a busman’s holiday for me, as CHY has recently carried out a programme of work looking into how the decommissioning process, which will result in the plant closing completely in approximately 2033, can kickstart Dounreay’s ambitions for jobs and growth across a wealth of sectors. Tourism will be key in years to come, as will offshore wind farms, both of which are great opportunities for the construction industry.

Funding for the decommissioning process at Dounreay was worth £189 million in the last financial year, with a slice of that designated to small and medium-sized enterprises (SME). It also maintains the 2,000 jobs currently on-site, which will gradually reduce as the project works towards completion.  

Construction Industry Opportunities in Dounreay

Those 2,000 jobs, and the many more that have disappeared since the plant stopped producing power, need to be replaced. There must be a regeneration of the local area to ensure it overcomes this loss of industry and blow to the workforce, and much of that will be driven by the construction industry. This is a great opportunity to add social value to what we do. We can provide business for the local supply chain, we can create opportunities for local labour and we can instigate apprenticeships to bring through the region’s next wave of construction workers.

But we can only do that if we take a long, hard look at the way we pay suppliers. 

Or, more correctly, how promptly we pay suppliers. This hit home for me because, whilst I was away, I was still chasing up a number of unpaid invoices that I had raised between 90 and 120 days previously. Some of them were for as little as £500. 

The Problem With Construction Industry Payment Terms

This is not a dig at any individual company. It is not a pop at any particular tier of the industry. A lack of prompt payment is an issue up and down the entire chain. In fact, my current most overdue invoice is sitting unpaid in the queue at a certain government body, which will remain nameless. It’s a long way from the five-day payment terms the government is suggesting it will implement in the future.  

Build UK brands late payment a “long-standing issue” and has published statistics for the majority of its contractors in an attempt to spur action. None of those firms who shared their data so far managed to notch up an average payment period of 30 days or less, something which the National Federation of Builders (NFB), an organisation of which I am proud to be a part, says shows “an utter disregard for small and medium-sized businesses and regional contractors.”

As an industry, we know the benefits to a firm holding onto cash, in terms of accumulating interest. We also know that a freshly rewritten purchase order can extend the eligibility period to remain within the regulations. In addition, under the Late Payment of Commercial Debts Regulations, firms have 60 days to pay when purchasing from another business, but this isn’t about the letter of the law. This is about the spirit of the law when it comes to the interplay between construction industry payment terms and social value. 60 days is a long time for a small business.  

Prompt Payment Code

Of course, there is a Prompt Payment code, but is not legally enforced. As Mike Cherry, national chairman of the Federation of Small Businesses, said recently, “the voluntary Prompt Payment Code is not working when it allows signatories like Carillion to pay on terms of over 120 days, so we want to see a new tough and transparent compliance regime being proposed.”

Why Prompt Payments Benefit Everyone

It is my strongly held belief that the promptness of payments can make or break any social value commitments.

The businesses in the supply chain can’t run on technicalities. If they aren’t remunerated in a timely manner, they can’t reinvest in their own business, they can’t fund sustainable local employment, they can’t pay their staff, they can’t settle up with their suppliers, they can’t take on apprentices, they can’t become an active member in the local economy and support the rebuilding of towns like Dounreay. 

How can they inspire our future workforce to meet the skills requirements if they can’t honestly promise that there is a future in which those skills will be rewarded with gainful employment? 

If these businesses, and those in their supply chain, have to fold, it doesn’t matter whether or not the timeframe was technically legal or not. 

Social value is all about ensuring the supply chain that runs right into the heart of local communities remains strong. A strong structure to the industry benefits us all. There are great opportunities to reinvigorate communities like Dounreay, but we will miss out if we don’t realise that payment terms and social value go hand-in-hand. 

In stark terms, if small businesses don’t get paid on time, we risk damaging local areas rather than reinvigorating them. In addition, if a supplier in a chain goes bust, it makes the job longer, more expensive or possibly even at risk of being cancelled. Prompt payments avoid that, making them a win-win for the industry.

What Can We Do to Encourage Prompt Payments? 

Harking back to the thoughts of Mike Cherry, the key word when looking for a solution to late payments is “transparent”. With the current average payment periods being made public by Build UK, we could put a simple scoring system in place. Simply calculate a percentage based on how many days over the recommended 30 they take to pay and remove that from their supply chain or social value response within tenders, which make up between 5 and 35% of the overall marks. It would be a bold move, but it would elicit a reaction for certain. 

What are your thoughts on the issue? How can we ensure payments happen on time in a manner that helps out all concerned?