European construction companies support plan to tackle late payment…with some major reservations

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Getting paid late is the bane of many construction companies.

That particularly applies to subcontractors who can find themselves waiting, sometimes for months at a time, for the cash they are owed to trickle down long supply chains.

And such long waits cause inevitable cashflow problems that in the worst case can cause businesses to collapse.

In fact, it is estimated that over 500 invoices are issued every second within the European Union, with around half not paid on time.

That is something the European Commission now plans to change. In September, it proposed new, beefed-up rules to tackle the problem.

The European Construction Industry Federation (FIEC), which represents 32 national member federations and construction companies across 27 European countries, is following the proposals with interest.

Why propose new late payment rules?

While many countries, including Canada, the USA, Turkey, Japan, New Zealand, Australia and the UK already impose legislation on late payments, that’s not the case in Europe.

Instead, there is currently a 2011 Directive that lays down a payment term of 30 days in business transactions. This can be extended to 60 days or more “if not grossly unfair to the creditor”.

But a Directive is not directly applicable to member states and first has to be transposed into national law before it can apply in each member state.

That is why the European Commission is now proposing a Regulation on the issue of late payment. This would be directly applicable to member states once it came into force.

Explaining the motivation behind the proposed move, the European Commission said that assessments carried out since 2015 found that the existing Directive “is not adequate to tackle the problem”.

The lack of preventive measures and effective enforcement as well as of redress mechanisms that are easily accessible to SMEs were particularly problematic, it said.

In practice, there is no maximum payment term, with terms of 120 days or more often imposed on creditors. The average time it takes businesses to get paid across Europe is 57 days, according to the European Commission.

The proposed new rules on late payment

Under the new Regulation, the European Commission proposes:

• A stricter, maximum payment limit of 30 days. Parties can still negotiate any payment term as long as it does not exceed 30 days.
• Enhanced protection of construction subcontractors. The proposed Regulation warns that failing to pay contractual payments to them on time risked a “damaging domino-effect in the supply chain”. The European Commission has proposed that contractors provide evidence to contracting authorities and contracting entities of payments to their direct subcontractors.
• Compulsory payment of interest on late payments, accruing until repayment of the debt, as well as a flat-fee compensation for all late payments. The European Commission has proposed a rate of late payment interest of +8% above the European Central Bank (ECB) reference rates.
• Member states will be required to set up their own enforcement authorities to monitor and ensure application of the rules. They will have the power to receive complaints, initiate investigations and issue sanctions against late payers that are “effective, proportionate and dissuasive”.
• Member states will also be asked to promote the voluntary use of Alternative Dispute Resolution (ADR) to preserve the contractual relation between debtor and creditor.

What are the construction industry’s first impressions of the proposals?

FIEC’s economic and legal policy officer Afonso Brito told the Construction Briefing that the most FIEC member federations are “generally supportive” of the Commission’s proposals.

However, there are concerns when it comes to some of the provisions.

Brito, who stressed that FIEC is still working on its official position on the proposals, said, “Some within the sector are concerned that the introduction of certain provisions, namely a proposal that contractors would be required to provide evidence of their payments to subcontractors, could produce more bureaucracy and contradict the aim of accelerating payments.

“For the same reason, some have also questioned plans for new enforcement authorities and the powers that they would have, as well as provisions to allow creditors to raise complaints about late payments.”

“FIEC believes that the Regulation should contain ‘clear, efficient and simple provisions’. The introduction of the aforementioned provisions has raised some doubts within the sector. 

Brito added, “In certain countries, late payment by public authorities is a big concern for contractors, many of whom are unwilling to risk starting a complaint procedure. Changing from a Directive to a Regulation is already a positive step to tackle this problem.”

Where do the proposed rules go from here?

The ball is now rolling on dissecting the proposals. Most recently, the Committee on the Internal Market and Consumer Protection (IMCO) organised a hearing on late payments on 25 October.

But it is likely to be quite some time before the proposed Regulation comes into effect since it requires approval by both the European Parliament and Council via a lengthy legislative process.

Once the proposed Regulation has finally been adopted, the eventual rules will apply one year after the Regulation has entered into force, to give time for businesses and public authorities to take steps to comply.