Why Legislation Isn’t Enough To Solve Construction’s B2B Payments Problem

The U.K. has become center stage for the late B2B payments fight as regulators introduce measures that aim to reduce the time it takes corporate buyers to pay their suppliers. Those efforts have raised further debate about the efficacy of the initiatives, with conversations that are ongoing about the best way to tackle the issue.

If there’s one industry in the U.K. that most demonstrates the problem of late payments, it’s the construction sector. Late B2B payments in this space have been so troublesome, in fact, that legislators introduced the Construction Act several years ago to address the issue. FinTech firms have stepped into the space, too, most recently with Optal and Open ECX. The firms announced earlier this month that they would collaborate to offer the construction sector a digital platform through which buyers can pay subcontractors.

According to Chloe Leigh, marketing director at Open ECX, the Construction Act — and its 2011 revamp — haven’t done the necessary job to reduce late payments in the space.

“There are a number of reasons to suspect that the revamped act hasn’t particularly helped matters,” she told PYMNTS. “For example, six months after the amendments to the act, Building.co.uk reported that it seemed some contract drafters were attempting to undermine the revised legislation by ‘toying’ with the new notice requirements and playing with the contract wording.”

Leigh went on to say that contractors and other industry players need to fully understand not only the legislation but their own payment processes in order to make the Construction Act as effective as it can be. She did admit that the mere existence of the act has helped to get buyers to pay their suppliers and subcontractors more quickly. But, she said, it’s difficult to enforce these rules — especially as subcontractors are often “reluctant” to arbitrate in case of a disagreement because these businesses depend on their contractors for work.

With regulation only going so far, and with an industry that — like many others — continues to rely on paper, the construction sector’s B2B payments practices are in need of a technological revamp.

“Ultimately, the best solution for the construction industry in relation to its AP challenges is an end-to-end process that uses automation to re-engineer the contractor and subcontractor integration,” she said, adding that key to the payments process is the cooperation between contractors, subcontractors and each party’s payment systems. “Whilst using a digital payment capability to pay subcontractors provides benefits — for example, ease of reconciliation, fewer payment disputes, reduced risk and cash flow optimization — the manual nature of the application for payment process limits the speed of payment impact.”

“It is only by implementing a full end-to-end, automated process that timely payments can be made in a manner that is certain and provides a real benefit to both the contractor and subcontractor,” Leigh continued.

Via their collaboration, Optal will provide its payments solution to Open ECX’s online WebContractor tool, offering a single platform on which all parties and their payment systems can link. With a lack of technology in this sector, Leigh pointed out that the construction space will continue to be the face of the late B2B payments problem in the U.K.

“In construction, there is a tendency to delay payment or pay less than what is due for various reasons, and this can lead to disputes,” she said. “These include the relatively subjective nature of inspections and valuations, issues around scope of work, disputes relating to change orders and the historical inclination for a contractor to ‘pay when paid.’”

According to Leigh, who cited 2016 statistics from the Asset Based Finance Association, B2B payment delays in the U.K. construction space increased 22 percent in a period of just six months, leading to the average time it takes for an invoice to be paid to be up to 82 days. And with construction being such a low-margin industry, Leigh noted, businesses can no longer afford to ignore or dismiss the demand for digital, automated payment solutions.