Construction Sector – Pay on Time, Every Time

early pay

Last week we published a post by Daniel Ball, director at eProcurement specialist, Wax Digital about procurement risk in the Construction sector. Today he follows on from that post with another construction sector focused issue -- late payments.

It’s common knowledge that late payments are at the root of the financial woes of many of the UK’s SMEs. The latest Zurich SME Risk Index shows that over half of small businesses are waiting for payments worth an estimated £225 billion, and, unfortunately for the construction sector, they are one of the worst hit with the Asset Based Finance Association reporting that they have to wait on average 107 days to receive payment, longer than any other industry sector.

In an attempt to combat this frustrating delay in payments, the Prompt Payment Code (PPC) was launched and sets out guidelines and standards for payment practices to encourage businesses to pay their suppliers on time. By complying with guidelines and standards set out by the PPC, companies in the construction sector can apply to become a signatory to the Construction Supply Chain Payment Charter (more commonly known as the Fair Payment Charter) – the construction sector’s own commitment to punctual payments to subcontractors and suppliers within fair and clearly defined time limits.

Complying with the charter promises both commercial relief for valued construction suppliers and also gives negotiation room for more favourable pricing in return.

For all of its benefits, signing up to the charter isn’t without its challenges. Compared with companies in other sectors, construction firms are often relatively undercapitalised as they have a much higher proportion of trade creditors coupled with the unpredictable nature of project completions creating payment deferrals from customers . This means that complying with the charter could add stress to financial liquidity as payments to suppliers are made, regardless of any incoming revenue delays.

The fact that many construction companies are still using legacy or even paper-based procurement systems and processes is adding to the problem too. All too often they rely on error-prone manual processes to raise purchase orders, receipt goods and services when delivered, and process invoices for payment.

Benefits of joining the Fair Payment Charter include improved efficiencies, better supplier relationships and also the ability to mitigate supplier risk. Here are four ways organisations can support the charter and improve prompt payment processes:

  1. Centralise and standardise processing and reporting

This is important for businesses that have different procurement systems and processes in place across multiple sites which can often be the reason that payments are delayed. If a company has a centralised function to record and track all payment activities it can collaborate more effectively with suppliers and auditors alike. Centralising and standardising both processes and systems should ensure more efficiency from requisition through to payment with less resource required to complete each payment-related task.

  1. Automate the process

Purchase-to-Pay (P2P) procurement systems can help improve compliance by reducing the need for manual processing. When a requisition is raised the system automatically requests approval from the relevant person or group which then generates an electronic PO on approval. When the supplier then submits their invoice, the system scans it for the PO and the Goods Receipt Notice (GRN) to see if there is a three-way match. Once the quantities, price and terms are validated, the invoice can be automatically processed for payment.

  1. Let Suppliers Self-Serve

A self-service supplier portal enables suppliers to manage their own profile and make sure their product catalogues, insurance documents and certifications are always up to date. It also helps suppliers track their order status via the portal which can help eliminate errors and minimise the impact of product shortages or changes to delivery schedules.

  1. Collaboration and communication

A P2P system gives you the platform to make prompt payments, but it is optimistic to expect that all suppliers will adhere to the 3-way match principals from the start. It is essential to communicate the process with suppliers to make sure they understand the invoicing rules and receive prompt payment. It is also possible to set up automated rules within your P2P system to detect any errors or mismatches, stopping the transaction taking place and flagging the problem to your suppliers and procurement team. The invoice will be returned to the suppliers for correction if necessary without any need for manual intervention. The processes can significantly speed up payment processes while eliminating any errors that can delay payment.

There’s no quick or easy fix to the ongoing late payments saga in the construction industry, and it may be sometime before certain organisations come round to the idea of adapting their normal working practices to avoid making late payments. However, for those organisations that take the necessary steps to comply with the charter and get their payment processes in order there are both commercial and reputational benefits to be had.

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