Late payment has long been the Achilles’ heel of the UK construction sector. Despite its vital role in the economy, the industry continues to grapple with delayed payments that ripple through supply chains, stall projects, and push businesses, especially SMEs, toward insolvency. So why does late payment remain so entrenched and what can be done to tackle it?
The reality behind the numbers
The statistics are sobering. Construction accounts for nearly one in five UK insolvencies, and over 70% of firms report being paid late on a regular basis. For many subcontractors and tradespeople, waiting weeks or even months beyond agreed terms is increasingly normal.
This delay in cash flow can have devastating consequences: suppliers unable to pay their own bills, projects grinding to a halt, staff wages delayed, and mental health pressures mounting.
Why it keeps happening
The construction sector’s structure is partly to blame. With long, multi-tiered supply chains, payment often trickles down slowly, if at all. Retention clauses, intended to safeguard quality, are frequently misused as informal credit mechanisms. And outdated payment systems only add friction to an already strained process.
Even when contracts are clear, enforcement is often weak. Many businesses fear jeopardising future work by chasing overdue payments too aggressively.
A turning point? Government reforms on the horizon
In response to mounting pressure, the UK Government has proposed sweeping reforms to tackle late payment head-on. These include:
- Mandatory maximum payment terms (60 days, reducing to 45)
- Automatic interest charges on overdue invoices
- Board-level accountability for payment practices
- Spot checks and enforcement powers for the Small Business Commissioner
- Reform or removal of retention clauses, with options like trust accounts or surety bonds
These changes could mark a turning point, if they’re implemented and enforced effectively.
What can construction businesses do now?
While legislative reform is welcome, businesses don’t need to wait for new laws to protect themselves. Here are some practical, proactive steps:
1. Tighten your contracts
Ensure your contracts include:
- Clear payment schedules
- Interest clauses for late payments
- Defined dispute resolution pathways
Joint Contracts Tribunal (JCT) contracts allow for suspension of work due to non-payment and include robust notice provisions. New Engineering Contracts (NEC) promote collaboration and transparency, with defined payment periods and early warning mechanisms.
These frameworks can help formalise expectations and reduce ambiguity.
2. Use project bank accounts (PBAs)
PBAs hold funds in trust and ensure simultaneous payments to all parties. They reduce risk and improve transparency, especially on public sector projects.
3. Improve credit control
Automate invoicing and follow-ups. Train your team to spot red flags early. Don’t let overdue payments slide without action.
4. Secure deposits and milestone payments
Break down payments into manageable stages. This keeps cash flowing and reduces reliance on final lump sums.
5. Monitor payment behaviour
Track how long clients take to pay. Use this data to inform future contract terms, or decide whether to work with them again.
6. Join fair payment initiatives
Signing up to industry charters shows your commitment to ethical practices and encourages others to follow suit.
7. Know your legal rights
Under the Late Payment of Commercial Debts (Interest) Act 1998, you can claim:
- Statutory interest (currently 8% above base rate)
- Fixed compensation
- Reasonable recovery costs
And if necessary, adjudication under the Housing Grants, Construction and Regeneration Act 1996 offers a fast, cost-effective route to resolve disputes.
At Stephensons, we are committed to helping you navigate these challenges. Whether it’s drafting stronger contracts, pursuing unpaid debts or advising on construction dispute resolution, we’re here to support you.