Coronavirus, late payment and the construction industry

27/05/2020

Before Coronavirus hit the UK, the construction industry already had a reputation for late payments, with small businesses in the sector often bearing the strain.

Now that late payment issues have increased across the board, we wanted to take a look at what this has meant for the construction industry.  

Government support

The government has had to try and find ways to support businesses and individuals in almost every industry during the Covid-19 pandemic. While some of their schemes have been well received and widely adopted, some industries have been left feeling like more support is needed.

To try and support small business, the government released information and guidance back in March as the Covid-19 pandemic escalated, which instructed public bodies to continue paying suppliers as normal until at least the end of June. It also stated that they should pay invoices received by suppliers immediately on receipt.

The government also introduced furlough schemes to try and protect the jobs of workers and provide a source of income for those unable to work. Some workers in the construction industry were eligible for these schemes, which were in place for both workers and the self-employed.

However, the Construction Leadership Council felt more could be done to support the industry. They addressed the prime minister with an open letter in early April, which outlined their proposed steps to sustain and accelerate recovery of the sector. 

The measures they suggested include:

• Suspending PAYE and CIS tax due to HMRC in April and May for construction and consultancy firms and workers.
• Deferring/cancelling Apprenticeship Levy payments due for the duration of the crisis.
• Extending the £25k SME business continuity grants scheme to the construction sector.

While more could be done by the government to support construction businesses, the responsibility of keeping the industry afloat cannot rest entirely on the government’s shoulders. Those within the industry, particularly the large companies, have to bear responsibility as well.

Reaction of large companies

Although the pandemic has affected businesses of all sizes, those most at risk in the early stages were the smallest businesses in the industry, sometimes made up of just single contractors. As the larger businesses began looking for ways to save money, some have chosen to delay paying their suppliers, contractors and other small businesses they work with.

Despite the government issuing instructions to public sector clients to continue paying contractors affected by the pandemic as normal for at least the next three months, many small businesses and contractors were still being left without much needed payments.

In a statement earlier this year, Andy Mitchell, Co-chair of the Construction Leadership Council, said: “There are a number of businesses that have chosen to unilaterally delay payment or extend credit terms. We do not believe this is acceptable or appropriate – particularly at this time of great stress.”

On the flip side, some companies have paved the way in supporting small businesses.

Home builders Taylor Wimpey introduced a ‘pay it forward’ scheme to support self-employed tradesmen and sub-contractors who were not covered by any government scheme.

Qualifying subcontractors could receive up to £600 each month for three months, to be recovered against future work carried out for Taylor Wimpey.

With many companies in the construction industry – Taylor Wimpey included – now beginning to go back to work with social distancing in place, some money should begin moving through the sector and associated supply chains again.

For residential construction companies such as house builders, all the projects that were near completion and put on hold should now be able to be completed, which will give companies cash flows a significant boost.

But for some companies in the sector, the road back to ‘business as usual’ may be more complicated, particularly where cash flow is concerned.

The future of the construction industry

In the UK the construction industry contributes up to 6% of the UK’s GDP, 7% of jobs and 13% of businesses.

At the end of 2019, the industry was experiencing a period of growth and projections were for this growth to continue throughout 2020 and into 2021.

However, the impact of Covid-19 on the UK economy has meant that not only will many industries not see the growth they were expecting, but they may find themselves facing major challenges in the coming months and years.

For the period where the majority of workers were unable to continue their daily jobs and operations were suspended, companies still had to cover daily running costs, bills, pay their own invoices (often for materials intended for jobs not completed) and pay any workers not on the furlough scheme.

Their cash flow will have taken a major hit, and in the cases where they didn’t have the capital available to cover these losses, they may find themselves in unexpected debt coming out of the pandemic and still unable to pay suppliers.

Further to that, projects across the sector may be cancelled or indefinitely postponed, leaving construction firms trying to play catch up with their projected income for the year.

With the economic fallout from Coronavirus expected to be extensive and possibly last several years, many companies are certainly not out of the woods just because they’re able to return to work.

As well as economical changes, the future will also bring about changes in the way the construction industry works.

One major change that has been seen across many sectors has been the rise in remote working. Many people who would never have previously worked remotely will now be considering if they can continue to work from home.

For many in the construction industry, working remotely isn’t an option, although some more specific job roles such as architects and project managers may find they’re able to continue working from home.

For all those unable to work from home, the recent easing of lockdown measures has meant that many workers have been able to return to site, but are now required to work with social distancing measures in place.

With no fixed date for when social distancing will be eased, the manner in which a lot of construction workers tackle jobs will be significantly different for some time, and this will add additional expense and stress onto already struggling companies.

Despite all the challenges ahead, the construction industry was In a strong position before the pandemic struck, and its ability to get back to work safely earlier than industries such as retail and hospitality give it an advantage when it comes to recovery.

Does your business supply the construction sector? Have you seen payment delays increase since the onset of the pandemic? Share your experiences in the comments section below.