As part of its Landmark Plan to Unleash Small Businesses, the UK Government has announced new plans to crackdown on late payments. Prevail welcomes the announcement as we believe it will make a huge difference to the construction sector.

Fewer than half of UK businesses in the construction industry are still trading after four years.[1] From Prevail’s work in the sector, we know that, too often, cash flow is a key reason why these businesses cease trading.

According to the Government, across the whole UK economy late payments are an issue that costs £11bn a year and is responsible for the shuttering of 38 UK businesses every day.[2]

Late payments hold back the construction sector

SMEs collectively employ around 16 million people in the UK, representing roughly 60 percent of the total private sector employment. Construction industry businesses make up 16 percent of SMEs in the UK.

The CIOB welcomed the Government’s plans. David Barnes, Head of Policy and Public Affairs at the CIOB said, “Late payments have plagued the sector too long, causing significant cashflow challenges, hindering growth and, in many cases, forcing business to shut up shop. Over the past decade, construction firms have accounted for approximately 18 percent of total insolvencies in England and Wales.”

Barnes continued, “Research figures suggest small businesses across multiple industries are owed more than £26bn in late payments. In 2022, more than half of all the invoices sent to construction firms were paid late, with data suggesting many major contractors were paying 20 percent of invoices late.”[3]

The latest Building Engineering Business Survey (BEBS) revealed 76% of private sector clients and 49% of public sector clients paid their contractors later than 30 days after work was completed, with 40% of their respondents reporting that 2.5-10% of their turnover was tied up in retentions.[4]

Government proposals are intended to enforce timely payments

The new laws are set to give stronger powers to the Small Business Commissioner to empower them to wield fines, worth potentially millions of pounds, against the biggest firms who persistently choose to pay their suppliers late.

The Small Business Commissioner will be given new powers to carry out spot checks and enforce a 30-day invoice verification period to speed up resolutions to disputes. The upcoming legislation will also introduce maximum payment terms of 60 days, reducing to 45 days, giving firms certainty they’ll be paid on time.

Launching the plan, Prime Minister Keir Starmer said: “From builders and electricians to freelance designers and manufacturers – too many hardworking people are being forced to spend precious hours chasing payments instead of doing what they do best – growing their businesses. It’s unfair, it’s exhausting, and it’s holding Britain back. So, our message is clear: it’s time to pay up.”

Gareth Thomas, Small Business Minister, added, “I want the UK to be the best place in the world to start a business, grow and succeed – and that’s why we’ve taken bold steps today. Too many small firms go under each year because they aren’t paid on time – that is completely unacceptable. I hear all too often about businesses who just don’t have the cash needed to start up or grow. Today, we’ve announced measures as part of our Plan for Change to tackle all of those issues and beyond. This is the government listening to businesses, working with them and delivering real change.”

Prevail’s view: A welcome step forward for construction industry SMEs

Our experience supporting SMEs in the construction sector to profitably grow means we see the impact of late payments on construction industry SMEs every day.

Prevail Accountancy founder Kasia Machalinski commented: “This news is important for our customers. When SMEs are paid late it has a significant impact. Very few SMEs can afford to finance projects for two to three months while they wait to be paid. We believe contractors should be paid within a 1 to 30 day period and any retention should be minimal.”

Kasia continued, “Retention is another big issue that affects profit and cashflow for many subcontractors. A big part of their profit can be tied up for twelve months, so profit is delayed. If the Government can crack down on these unfair practices it will be a real positive for the sector, especially in today’s economically difficult environment. I believe we will see fewer business closures as a result. Cashflow is absolutely fundamental to business success and profitable growth.”