Urgent reform and new approaches are needed to tackle construction’s worsening late payments crisis, writes Andreas Mjelde co-founder and CEO of Two
The construction industry is a cornerstone of the global economy yet many businesses in the sector are struggling with financial instability and operational inefficiencies.
This is mainly due to one specific challenge: late payments. In the UK alone, the construction industry contributes about 7% to the country’s GDP and employs over 3m people, representing 9% of the UK’s workforce.
However, research shows that the construction industry accounted for 18% of insolvency cases, resulting from cash flow problems, making it one of industries most severely impacted by late payments in England and Wales.
The construction industry urgently needs a comprehensive overhaul of its payment infrastructure to prevent this crisis from worsening.
The growing problem of late payments
Late payments in construction are not only widespread; they are getting worse. Reports show a 60% increase in subcontractors experiencing late payments between 2022 and 2023. This delay in compensation disrupts cash flow, forces businesses to cover material costs out of pocket and threatens the financial stability of stakeholders.
A 2024 BUILD study found that 71% of subcontractors reported delayed payments from general contractors, while 77% of subcontractors had to prepay for materials severely hindering their operational capacity.
The root cause lies in slow and outdated manual payment structures. Data from Datos Insights reveals that 69% of construction firms reportedly still make payments using paper checks, while a surprising 57% still rely on cash for business-to-business payments. These antiquated methods not only impede cash flow but also cause unnecessary delays and administrative burdens.
Consequences of late payments
While the BUILD report indicates that 46% of subcontractors cite cash flow as a major challenge for their business, the effects of late payments extend far beyond cash flow issues.
These financial hurdles inflate project costs, hinder timelines, and exacerbate labour shortages.
The effect is such that contractors and subcontractors are turning down work, with a staggering 88% of subcontractors declined projects in 2024 due to poor financial practices.
Furthermore, in the US alone, late payments cost the industry $280bn, with 82% of contractors waiting over 30 days for payment.
This financial strain ripples through the industry, affecting workforce quality, project timelines and overall productivity. Delayed payments trigger a chain reaction, affecting not only the subcontractors but also the workforce. 80% report a decline in work quality, 75% experience extended project timelines, and 63% suffer from inconsistent crew attendance.
These challenges compromise safety, reduce efficiency and force subcontractors to turn down job opportunities, while perpetuating a cycle of inefficient and poor work quality.
The need for digital payment solutions
We need to see a fundamental shift to digitised payments in the construction industry. Implementing faster, more reliable payment systems will ensure that contractors and subcontractors are paid on time, which will in turn increase job opportunities, improve labour productivity and ultimately streamline construction processes.
Initiatives like the New Fair Payment Code have sought to remedy this issue with incentive schemes which encourage 30-day-and-less payments, but more action is needed. Digitised systems which are quick, easy to use and efficient, must be widely adopted to prevent further financial strain on business owners.
In particular, the construction industry must embrace digital payment solutions like “Buy Now, Pay Later” (BNPL), which has already revolutionised B2C payments, and is beginning
to become increasingly popular in B2B sectors.
The BNPL model offers significant advantages for construction by providing short-term financing at the point of purchase. This financial model enhances cash flow, allowing companies to spread their costs over time and alleviate immediate financial burden often associated with large business transactions. A steady cash flow enables smoother day-to-day operations, increases flexibility, prevents project delays caused by funding gaps and
ensures that projects stay on schedule.
By integrating similar innovative systems, the construction industry can enhance efficiency, reduce financial risk and ensure a strong, streamlined and productive future unburdened by outdated payment practices.
It’s time to leave the dark ages behind us – ditch the paper invoices and embrace innovation.
The post Reform and innovation critical as late payments cripple the construction industry appeared first on Planning, Building & Construction Today.
