It’s time to tackle late payments
By Mike Hayes10 November 2022
The construction industry is no stranger to disruption. Building projects can grow in complexity, unexpectedly going over budget and time, while the number of stakeholders involved can make processes unwieldy and onerous.
However, as a result of the cost-of-living crisis and rising inflation, many construction businesses are under more pressure than before. Struggling with the financial implications of these issues and the rising cost of materials, firms are also being affected by late payments, which are sometimes intentionally held back by larger businesses, or are a result of cash flow difficulties.
A recent Xero study found 88% of large construction businesses source materials from small suppliers. When late payments occur, the threat of overspending and project delays increases, due to the material supply chain being disrupted. This financially damages firms across the whole network.
Late payments to smaller firms are not always intentional. However, paired with the current economic climate, larger firms must be aware that cash flow issues threaten the very survival of the smallest businesses. If small firms fall into financial disarray, it could result in insolvency, which will have a knock-on effect on larger organisations who rely on these businesses for materials and services.
It is in the best interest of large businesses to support smaller suppliers with reliable, on-time payments. So, what can bigger construction firms do to avoid late payments and help smaller firms in the coming months?
Xero’s research found that half of construction companies (50%) consider paying their suppliers on time to be a priority and nearly a third (29%) consider it to be very important to their business. However, large construction companies were some of the most likely to pay suppliers late, with three-quarters (75%) paying later than the agreed time in the last 12 months.
Transparency between smaller suppliers and large construction companies is key. Regular communication and meetings with partners can help identify potential cash flow issues and avoid disruption.
In many cases, firms are unaware of their suppliers’ cash flow issues until it is too late. Smaller firms should be considered an extension of the supplier’s company to increase transparency and to avoid potential pitfalls.
Furthermore, in instances where a larger business risks paying their supplier late, they should inform them in advance. This will give suppliers time to plan around delays, instead of finding themselves unexpectedly short when it comes to paying their own overheads.
This grace period is key to maintaining supply chain stability and preserving relations between big firms and smaller suppliers.
Large firms can also look to build personal relationships with their small suppliers to familiarise and understand the challenges they face. For example, many smaller firms are family-run companies who operate under strict financial conditions. Late payments can leave these firms unable to pay their own suppliers, or in some cases, their staff.
Additionally, small businesses often don’t have the luxury of larger internal support networks. Many value the relationships they have with their suppliers and rely on their support and understanding during uncertain periods or when unexpected challenges occur.
Being aware of the challenges small businesses face not only helps build strong relationships, but makes it easier to understand the disruption caused by late payments.
Meanwhile, education on the impact of missed payments across all levels of an organisation is vital. All employees should understand the urgency of paying small businesses on time and what it could mean for their cash flow if it doesn’t happen.
If individuals are aware of the negative consequences of late payments to not only their suppliers, but the organisation they represent, the repercussions could act as a deterrent.
Tweak the language
Psychology is a really important factor when thinking about this topic, and going one step further, large organisations should consider altering the language used to define late payments.
The expression “late payment” legitimises poor practice. Instead, we should refer to it as “unapproved debt” to help communicate the urgency of the problem. A shift in language can help reinforce the financial consequences it has on suppliers.
The next step
It’s a challenging time for the construction sector, with difficult economic conditions forecast over the coming months. Industry bosses must work closely with their suppliers to ensure small firms are paid on time.
The key driver to improve relationships with smaller firms – and avoid late payments – is communication. Some may look at difficult conversations over cash flow issues as a hurdle, but the current climate provides an opportunity to do so.
With a conscious, forward-thinking approach to paying suppliers on time, the construction industry can be well equipped to navigate hurdles in the coming months.
About the author
Kate Hayward is director of operations UK & EMEA at Xero, a New Zealand-based technology company that provides cloud-based accounting software for small and medium-sized businesses.
The company has offices in New Zealand, Australia, the UK and the US