Late payment – a perennial problem with a digital solution?

Andrew Croft, associate at solicitors Beale & Company, suggests that the way to tackle late payment is to consider it alongside other moves to digitise the industry.

Andrew Croft

Late payment has been an issue for some time now, but a consultation paper published in October 2015 by the Department for Business, Innovation and Skills highlighted that small and medium-sized businesses are currently owed a total of £26.8bn in late payments.

This is particularly an issue in the construction industry, as shown by a study from the Asset Based Finance Association earlier this year, which also found that firms were having to wait an average of 107 days to receive payment. 

Although the UK government has attempted to ease the route to payment in the construction industry by way of the Housing Grants, Construction and Regeneration Act 1996, as well as the amendments to the Act which took effect in October 2011 (“the Act”), the Act is often difficult to comply with (see this Beale & Company webinar on the Act from Feb 2015).

It is also common for construction contracts to require parties to jump through additional hoops. There has been a significant amount of recent case law regarding the Act which confirms that to be entitled to payment, it is key that one complies with both the Act and the requirements of the relevant contract (see also a second Beale & Company webinar on the issue which followed a spate of cases in the Technology and Construction Court regarding late payment.)

One solution to late payment currently being adopted is the use of project bank accounts, whereby the contractor and named members of the supply chain are paid out of a single account. Highways England has recently announced that it has awarded £10.4bn of work using project bank accounts – however, they are rarely used outside the public sector and there are concerns as to their suitability on smaller projects.

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Another way in which the industry is attempting to tackle late payment is through the use of charters, such as the cross-industry Fair Payment Charter and the Construction Supply Chain Payment Charter. If an employer has signed a charter and fails to comply with it, notifying non-compliance can provide a further “stick” to use to encourage payment.

However, one view is that these charters can be of limited effect. With the Construction Supply Chain Payment Charter due for a relaunch at an unspecified date this year, it remains to be seen how many contractors are willing to embrace it.

Some further positive steps have already been taken by the UK government, such as the requirement for large companies to report on payment practices, which will apply from April 2016 under the Small Business, Enterprise and Employment Act 2015.

There has also been a recent consultation (by BIS) regarding “grossly unfair” payment terms and practices being challenged by representative bodies on the basis that such behaviour is non-compliant with the 2011 EU Late Payment Directive (and the proposed Enterprise Bill).  However, it is unclear whether these measures will have any teeth.

Late payment is a key issue as it is disruptive to any project and means there is limited incentive for parties to innovate and “go that extra mile”. One new way of addressing the issue could be to take a lead from the significant progress which has been made by the construction industry in the adoption of BIM. The use of BIM provides additional clarity across the project team regarding the progress of a project, with all key information stored on a central system.  

Why not also apply this approach to the payment process? This would provide additional transparency and consistency to reduce the risk of a dispute. Various digital tools are currently being offered by companies such as Textura Europe which could take payment on a construction project into the digital age. 

This involves, among other things, a cloud-based platform being used to automate and standardise the payment process, so that it is easier for the supply chain to remember when applications must be made. The use of pre-agreed forms also reduces the risk of a paying party refusing to make payment based on a pure technicality (such as the wrong invoice reference being used). 

Moreover, such an approach can give the supply chain visibility of the payment cycle, reducing the risk of the paying party claiming that they have not received an application, when in fact it is “sitting on a QS’s desk”. 

While it will be important to ensure that the contracts being used on the project reflect this new approach to payment (and, for example, do not mean that hard copy applications must be submitted alongside the digital system) it provides some hope that the issues associated with late payment may finally be addressed.

Andrew Croft of Beale & Company Solicitors can be contacted at [email protected] and tweets from @andrewiancroft