The government’s commitment to “Get Britain Building” is welcome, but realising the economic benefits on offer means getting to grips with the poor payment practices that plague the construction industry, argues Louise Stewart, CEO and founder of ProjectPay
The UK construction industry cautiously welcomed the chancellor’s recent Spring Statement announcement of a government skills package worth £600m to train 60,000 workers to build homes, as well as an additional investment of £2bn in social and affordable housing. This is set to deliver 1.3m homes over the next five years, close to the manifesto promise of 1.5m within this parliament.
The government’s top priority is reviving growth after 15 years of stagnation and they are hoping that the building and construction sector can help them achieve this goal. Yet despite government assurances they are fixing the housing crisis, the recurring financial instability which underpins the building sector, if not addressed, may lead to the “Get Britain Building” initiative resulting in a profitless boom.
Late payments mean poor cashflow
It’s no secret that the UK has the highest number of builder collapses and some of the worst payment times in the world, with recent figures released in March by the Insolvency Service highlighting the shockingly high rates of insolvency in the UK construction sector.
The issue stems from inequity in the supply chain. The larger construction firms are preserving working capital in the wake of economic uncertainty, and this is bad news for the small businesses that make up 98% of the construction sector.
They struggle to get timely payments from larger contractors, leaving many struggling with the burden of expensive debt while they wait a very long time to get paid. Both they and tier-one contractors are finding it challenging to deliver projects because so many firms are collapsing as a result of poor cashflow.
To get to the heart of the problem, ProjectPay, the construction payments fintech, received a project grant funded by Innovate UK to research and test how to solve cashflow problems in the construction industry.
Its report, published in March, highlighted three important issues: the industry is burdened by outdated financial models and banking structures with many small businesses unable to access low-cost or affordable working capital; Project Bank Accounts, used by the government to provide some protections, are ineffective, costly and should be replaced; and finally, in order to remove government’s exposure to private sector losses, the report recommended that the government’s ENABLE Build programme is modified to address access to capital for SMEs.
Payment performance
With the current regulatory environment in the UK doing very little to provide security of payment in the sector compared with other countries, this could be a deterrent for private investment into the UK construction sector.
On the other hand, private investment on infrastructure projects that may adopt a “profits at any cost” approach, as has been experienced with the “vampire kangaroo” Macquarie Bank and their investment into Thames Water, exposes SMEs to potential collapse.
The government’s new Procurement Act, which came into effect in February, will make strong headway in addressing the problem. It mandates for government projects to report on contractor payment performance across the length of their supply chain. It is now a key priority for government to access reliable payment performance data and to be able to enforce 30-day payment terms.
The government is the UK’s largest construction client, transacting billions in payments each year on construction projects (with plans to spend £650bn on public projects over the next decade). The Procurement Act will ensure that this investment benefits the UK economy by creating jobs and prosperity and protecting against more collapses.
In support of the act, ProjectPay is working with various government departments to replace suboptimal Project Bank Accounts, which further constrain the working capital of contractors. The ProjectPay platform addresses the slow payments and cashflow challenges of the sector, while enabling small businesses to benefit from the embedded debt provided by using the platform.
Fundamental reform to payment practices in construction
ProjectPay’s report highlights that the economic impact of this building boom could be devastating for the sector if insolvency rates are not addressed, thwarting the government’s ambitions to grow the economy.
It explains that the ISG collapse in September 2024 made a mockery of payment performance reporting, which ranked ISG among the industry’s very best payers, when in reality subcontractors were owed large amounts and were battling to get paid.
This draws parallels with Australia in 2024, when government investment caused insolvency rates to skyrocket to their highest rates on record, damaging the construction sector and leaving it with an even more diminished workforce unable to deliver the housing and infrastructure needs of the nation.
Many in the industry are now calling for fundamental reforms and new payment models to address and prevent recurring financial misconduct and instability impacting construction in the UK.
The government’s investment, along with new planning reforms provides a wonderful opportunity for the sector. Creating a fairer system for construction businesses, that reduces financial pressure, is crucial to future success.
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