Late payment is a problem in all industries, but none more than construction, where the application for payment process can be a real challenge

It can be tough getting paid in any industry, and everyone who works in business knows that their invoices can be waylaid for a variety of reasons. It is essential, however, for both sides in any transaction to live up to their obligations, and to do so to the letter of the law.

The construction industry, with its complex projects and high materials and labour costs, not to mention its heavy reliance on subcontracting, is particularly vulnerable to late payment.

In the construction industry, squeezing subcontractors and suppliers is almost accepted practice. The 2016 Euler Hermes Quarterly Overdue Payments Report found that late payments in our sector increased by 26% in 2015.

The straitened economic conditions and political uncertainties of 2016 can only mean that late payments are now even more commonplace, and can ripple through projects and supply chains, forcing some businesses to the brink of bankruptcy.

So what is the regulatory framework in this area? How does the law protect us from the impact of late payments?

Getting payments right

The Late Payment of Commercial Debts Regulations 2013 specifies that suppliers – in this case subcontractors – are entitled to payment within 30 calendar days when the purchaser of goods and services when dealing with a public entity, and within 60 calendar days when dealing with a private business.

This is backed-up by the EU’s late payment directive (2011/7/EU), which was updated in 2011– at least until Brexit comes into play. Though, as the directive was written into UK law as the The Late Payment of Commercial Debts Regulations 2013, there is little reason to believe that things will change dramatically when and if the UK triggers its planned exit from the Union.

But 30 or 60 days from what date?

The UK Construction Act (formally known as The Housing Grants, Construction and Regeneration Act 1996), was amended with specific reference to payments, with the clear objective of making sense of responsibilities when it comes to the contractor–subcontractor relationship.

Under the Act, the process begins with the subcontractor making an application for payment, either because they have completed the work or are making an application for an interim payment.

Any contract greater than 45 days must now include provision for interim payments.

The next event in the process is the due date, which acts as a timestamp on the way to payment. No less than five days after the due date, a payment notice must be served by the contractor to the subcontractor. If the contractor fails to do this, the subcontractor is entitled to serve the contractor with a payment notice.

If the contractor wishes to pay less than the agreed sum, they must issue a Pay Less Notice in a timely manner.

The last stage is the final date for payment, on which date payment must be made.

Failure to pay at this stage results in the triggering Late Payment of Commercial Debts Regulations 2013, which allows the subcontractor to pursue legal remedies. This includes for the provision of debt recovery costs, something all parties will likely want to avoid, and which can be avoided by sticking to the agreed terms and legal framework designed to keep cash flow moving in the industry.

It may seem complicated, but the rules are there to help all parties, and when complied with, at least one area of this most complex of industries can be dramatically streamlined. When everyone – suppliers and contractors alike – is playing by the same rules, the biggest worry will be weather on site, and not how much is owed by whom or when will it be paid. After all, your time is more profitably spent on site than in the courts.

Takeaways

• Most construction businesses face late payments and resulting cash flow problems.
• The UK’s regulatory framework mandates strict time limits on delayed payments.
• The UK Construction Act sets out very clear procedures for both parties in a contractor-subcontractor relationship.