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Late payment and retentions have long been a blight on the industry. An exclusive Construction News survey of subcontractors shows the problem is ruining not only companies, but lives
“I’ve had that two-o’clock-in-the-morning thing where your imagination is running wild – you can’t sleep as you’re stressing,” the director of one subcontractor tells Construction News. “And then that gets into your home life. You spend your life building up a business, and then unscrupulous contractors can just take you down. If this was an employer-employee scenario in a workplace, it would be bullying.”
This builder is far from the only one to suffer sleepless nights and anxiety over missing payments from contractors. Responses to a CN survey on payment reveal that retentions remain rife in the industry and it is not uncommon for payments to take several years to be recouped. Specialists report being paid late on most of their contracts, as well as frequent underpayment. And a shocking 81 per cent of the 217 respondents say poor or slow payment has affected their mental wellbeing.
Here, CN lays out the eye-opening perspectives of those at the mercy of poor payment practices.
Bad payment practices are having a devastating impact on the mental health of small-business owners in the supply chain. In written responses to a question about mental health, 66 survey respondents (30 per cent) admit payment issues have caused stress, while 21 (10 per cent) describe suffering sleepless nights. Others say the problem has led to “worry,” “anxiety,” “depression” and “high blood pressure”.
One survey-taker writes: “The damaging effects of payment-terms abuse has made me hate an industry I used to love. In my time, I’ve seen friends and colleagues suffer marriage breakdowns, attempt suicide and actually kill themselves over money troubles and business failures caused by non- or late payment by major contractors. It’s a shameful disgrace.”
Survey responses highlight an “aggressive” culture of payment disputes, with many feeling that they have to “battle” to get paid. “A disproportionate amount of time is spent chasing, arguing, negotiating for payment,” says one.
Some 32 written answers (15 per cent) acknowledge instances of bailing out their own company to pay employees or suppliers, either by foregoing wages themselves – sometimes for months – or by tapping into family savings or their pension.
“The constant worry regarding speed of payment and amount of payment has a significant impact, and not just to me – my family may also feel the pressure I am under,” says one respondent.
Another writes: “Stress and anxiety and fear plague my life daily. The whole construction industry is a depressing and hard industry […] It offers very little reward, just bitterness and unfairness.”
Mental health issues caused or compounded by cashflow problems are tough to step away from. “Should a business owner wish to take a break due to mental wellbeing, not only would the business likely fall into administration,” says another respondent, “[but also] the stress related to taking a break would only be increased due to the undoubted combined additional pressure from employees and debtors.”
Sarah Bolton, chief operating officer at construction mental health charity Lighthouse, says that 37 per cent of people who contact the charity cite financial need as their main reason for reaching out. The charity “can’t directly correlate” this with slow payment, but she says there is little doubt that financial worries go “hand in hand with emotional pressures and strains that can impact on mental wellbeing”.
Mark Reynolds, chief executive of Mace and co-chair of the Construction Leadership Council (CLC) is under no illusions about the impact of payment issues on wellbeing. He says he is unsurprised by the high proportion of subcontractors who say late payment has affected their health – and adds that there is an obvious reason why it’s an under-discussed issue. “The people who really suffer from this are business owners because they care about their workforce,” he says.
“And they’re not sharing [their woes] with anyone; a cashflow problem is not something that you go talking about, as the first thing that people will do is to stop paying you cash.”
‘We’re a free credit line’
Many subcontractors argue that they are used as creditors by main contractors, in that they carry out work and pay material and supplier costs a long time before receiving money themselves.
“Too many times, payments are delayed, often without notification; payment notices [are] often not issued [and] subcontractors [are] used as a bank,” writes one survey respondent.
Another says: “We basically provide a free credit line to the big players.”
Main contractors deny that this is a deliberate ploy. Reynolds says 35 per cent of Mace’s late payments are due to delayed approval, explaining “we have quite a rigorous payment system”, but “if somebody in accounts doesn’t press the button soon enough, it’s delayed”. He emphasises, though, that these tend to be very small payments and that bigger payments are prioritised. Reynolds adds that other major causes of delay are suppliers not having a purchase order in place, not following the appropriate processes, or making errors; to illustrate this, he says contentious invoices make up 6 per cent of the firm’s late payments.
Whichever view one takes, 60 per cent of surveyed subcontractors say they are paid late on more than half of their contracts, with 28 per cent saying it happens with over three-quarters of jobs. Just 4 per cent say they are paid in under 30 days on average; for 69 per cent, it is typically between 31 to 60 days; while 27 per cent say they are usually paid after more than 60 days.
Subcontractors are given an array of reasons by their clients for slow payment, including minor discrepancies with forms, staff turnover and, in one case, a finance director being unable to authorise payments after breaking their leg. Often, though, there are no excuses at all – just more promises or cold silence.
The problems with payment do not end there. As well as late settlement, subcontractors report frequent underpayment for their work – with 50 per cent saying they are paid less than the amount invoiced on more than half of their contracts. Several subcontractors say they receive “spurious contra-charges”, with clients carving sums off payment. This may be done via a pay-less notice, which may be served as late as one day before payment is due – meaning that even if successfully challenged, payment will be pushed back into the next month’s cycle. Subcontractors also encounter problems with contractors failing to certify payment applications, especially when they cover variations in the
scope of work.
Sometimes contractors just seek to pay less: only 11 per cent of subcontractors say they are never asked for discounts on jobs they have started or completed, while almost half (46 per cent) are asked “often” or “all the time”. In one example reported by CN, homebuilder Vistry wrote to its supply chain in September asking for a 10 per cent discount on all current contracts.
Data in question
Not all main contractors are poor payers and not all payments are made late or under value. Plenty of subcontractors say they have good clients as well as bad, and avoid repeat business with the latter if they can – although the pressure to secure ongoing work looms large.
“It’s probably a bit strong to say that late payment is rife,” says Leighton More, chief financial officer at Sir Robert McAlpine. “The sector certainly has an ongoing problem with late payments but there’s good empirical and anecdotal evidence to suggest the issue has improved in the past few years.”
He points out that the average payment time has fallen from 45 to 30 days since 2018, according to payment data published by large contractors as part of their obligations under the government’s 2017 duty to report on payment practices and performance rules. While this is true, the numbers are not exactly flattering, with 11 well-known contractors still admitting to paying 20 per cent or more of their invoices late. Moreover, scepticism abounds over the reliability of contractors’ self-declared data.
CN has previously reported on the “huge gaps” in what is required to be reported; and even Reynolds admits that some contractors are “gaming the system”, suggesting that companies should be audited on payment data.
The payment survey also reveals that the use of retentions – typically, up to 5 per cent of a contract’s value withheld to provide security against defective work or the insolvency of businesses in the supply chain – remains pervasive. Four in five (82 per cent) of subcontractors say they have retention clauses on more than half of their projects, while 65 per cent say the same is true on more than 75 per cent of their jobs.
The survey shows that retentions are often held for several years, with only 17 per cent of respondents saying they are generally repaid within a year of finishing work. Almost half (48 per cent) of companies say it takes, on average, between a year and two years for retentions to be returned; 31 per cent say it takes two to three years; and for 4 per cent, it takes more than three years. One respondent says that in one case they were only paid after nine years of chasing.
As retentions may only be paid when a building is handed over, those on site earlier in a project lifecycle – such as structural subcontractors – tend to have to wait longer for retention payment than fit-out specialists and others that come later. Those without retentions tend to work in sectors where they are not applicable, such as temporary works.
Respondents also confirmed that the retentions sum withheld is often 5 per cent of a project’s value, reducing to 2.5 per cent after a period, rather than the standard 3 per cent decreasing to 1.5 per cent set out in JCT contracts.
“Retentions are far too high at 5 per cent,” one subcontractor says. “Most subbies only make a net 5 per cent profit so you end up waiting two years, sometimes, for your profit on a job.”
Some 40 per cent of respondents say they do not receive their full retention sum on at least a quarter of projects, with a plethora adding that they have lost tens or hundreds of thousands of pounds when firms have folded before paying their retentions – a problem that is worsening amid a calamitous surge in construction insolvencies.
The weakest link
Late payment and retentions pose an increasing danger to subcontractors already hammered by the effects of Covid-19, material and labour inflation, the reverse VAT rule changes introduced in 2021 and high interest rates. Even main contractors are worried.
“If the supply chain can’t deliver, then we can’t deliver,” says More. “It’s proof positive of the idea that a chain is only as strong as its weakest link, and late payment can add additional stress to a chain that is already under pressure.”
Nevertheless, there is concern that sharp payment practices won’t just continue, but worsen. A CLC update published in September warned that “with the availability and cost of financing options increasingly limited, commercial behaviour is likely to harden, putting pressure on lower tiers and SME companies, reducing cashflow capacity and making liquidity a greater challenge”.
For mental health support call the Lighthouse construction industry helpline on 03456 051956 in the UK or 1800 939 122 in the Republic of Ireland. Or call the Samaritans on 166 123.