New payment charter could put financial pressure on top construction firms
28 May 2014
A new construction payment charter introduced last month to speed up payments to subcontractors could put financial pressure on top construction firms, says Alex Murray, Teaching Fellow at The Bartlett School of Construction and Project Management.
The Construction Leadership Council launched the supply chain payment charter in April and nine companies represented on the council have already committed to its terms. The aim of the charter is to reduce the industry’s standard payment terms to 30 days on both public and private sector jobs by 2018 and to achieve zero retentions by 2025.
Alex, who co-authored a paper for the Department of Business, Innovation and Skills on construction trade credit with Graham Ive, told Construction News, that a third of assets on a typical tier one contractor’s balance sheet are financed by trade credit and accruals, compared with 11 per cent in other industries. If they agree to new payment terms under the charter, these contractors would have to find alternative finance - while this may be straightforward for larger companies, smaller tier ones may struggle to finance operations.
Alex said, “There’s a question as to whether the government, in a period of anticipated industry growth where resources and labour are becoming scarcer and so prices are rising, is willing to absorb the potential consequences of reducing trade credit. One consequence might be additional increases in prices to compensate contractors for reducing their use of cheap trade credit. Further it might reduce competition in the long run by increasing the financing restrictions on tier ones.”
View Alex Murray and Graham Ive’s BIS research paper number 118: Trade Credit in the UK Construction Industry