Duty to Report will be a game changer for the construction industry. Get to grips with the new rules and the potential impact on your construction business
By October 2017 the Duty to Report on payment practices and performance will become mandatory for large businesses that fall within its scope. Twice a year, these businesses will need to publish their payment terms, processes for dispute resolution and payment performance metrics along with other payment information on a central government website, which will be publicly available.
The aim of these new rules is to increase transparency and public scrutiny of large businesses’ payment practices and performance, as well as giving suppliers access to the information that they need to make informed decisions about who to trade with.
These requirements will have a huge impact on the UK construction industry, where an average of between 50-75% of the total value of work on construction projects is accounted for by the supply chain. Many large businesses acting as main contractors will come under the scope of the regulation, allowing the many SMEs they sub-contract to examine and compare their payment practices and performance.
In an industry where poor payment practices are endemic, there must be hundreds, if not thousands of managers wincing at the thought of such a level of scrutiny. But is it really such a bad thing?
According to government figures, SMEs were owed around £26.8 billion worth of late payments as of June 2015. UK construction firms account for a hefty share of these – 31% across all sectors.
Large construction firms who pay late choke off their smaller partners’ cash flow, jeopardising their ability to trade and in the worst cases, forcing them into insolvency. At a time of critical skills shortages, no one wants this! Duty to Report has finally introduced a means of driving out unfair payment practices from our industry.
Will your company need to comply?
Compliance with Duty to Report will be mandatory for construction companies and LLPs who are large enough to satisfy at least two of the following criteria on both of their last two balance sheet dates:
- Annual turnover greater than £36 million
- Balance sheet total greater than £18 million
- Over 250 employees
The regulation applies equally to public, private or quoted firms and also individually to companies, even if they are part of a larger group. The law firm Pinsent Masons advises that ‘a group of companies may be required to publish a report for each group company which satisfies the above criteria, as opposed to consolidated information about the wider group’.
What are the reporting requirements?
Duty to Report is designed to offer comprehensive insight into the payment practices of large organisations in order to give suppliers useful and meaningful information.
The most significant compliance requirements for construction companies include:
- Written descriptions of payment terms, including standard payment periods and the longest payment period entered into during the reporting period.
- Statement of the process for payment dispute resolution.
- The publication of metrics showing:
- The average time taken to pay invoices from the date of receipt of invoice.
- The percentage of invoices paid within the reporting period which were paid in 30 days or fewer, between 31 and 60 days, and more than 60 days.
- The proportion of invoices due within the reporting period which were not paid within agreed terms.
- An indication as to whether the organisation:
- Offers e-Invoicing.
- Offers supply chain finance.
- Deducts sums from payments as a charge for remaining on a supplier’s list, and whether it has done this in the reporting period.
- Adheres to a payment code, and the name of the code.
Businesses will be required to report 30 days after the first six months of their financial year, and again 30 days after the end of their financial year.
Only contracts relating to goods, services or intangible assets and connected to the carrying on of a business will need to be reported. They must also have a significant connection to the UK.
A game-changer for construction businesses
Compliance with Duty to Report is really only half the story for your construction business. Now that the regulation gives your suppliers, your competitors and your customers visibility into your payment practices and performance, fairness and efficiency around payments to suppliers will become another means of competition.
Businesses with better payment standards will pull ahead of their competitors. Your reputation and survival in the market depends on your payment practices and performance reaching or exceeding the benchmarks set by the best performers.
With October only a few months away, the time to start cleaning up your payment practices is now. To help you, we’ve compiled a useful eGuide that not only offers a comprehensive overview of the Duty to Report regulations but also details full the implications for your business and the most effective steps you can take to mitigate them.
- Mandatory reporting under Duty to Report on payment practices and performance regulation will come into effect in October 2017.
- Large construction companies and LLPs, particularly main contractors, will be brought under its scope.
- These companies will have to publish information relating to their payment terms, dispute resolution processes and payment performance metrics on a central government portal.
- Suppliers will be able to compare payment performance between companies in order to make an informed choice about who they wish to trade with.
- Construction companies who demonstrate best practice, fairness and efficiency in relation to construction payments will be more competitive.