ProjectPay weighs in on the Future of Payments in construction

Table of Contents

• Construction Payments Today
• Can Digital PBAs with Embedded Finance be the Solution?
• Payment Processes and Regulations
• Industry Challenges and Advances
• Forward-Looking Strategies
• Evolution of Payment Methods
• Addressing the Costs and Complexities of Construction Projects
• Enhancing Communication and Compliance
• Conclusion

Words of Industry Insider: Louise Stewart

In the world of construction, there’s a hidden problem. Small businesses, which comprise 98% of the industry, face a big financial struggle. They do the work but often don’t get paid on time. And when main contractors go bust, which regularly happens, these same small businesses often end up with nothing.

The UK construction industry has experienced the highest rate of insolvencies, consistently ranking at the top across all sectors, with over 3,394 companies failing in 2023 alone.

So, what’s the solution? Louise Stewart, the founder and CEO of ProjectPay, has been collaborating with The UK government and global banking partners to safeguard construction payments. She firmly believes a fintech solution is key to this pressing issue.

Construction Payments Today

The construction industry’s payment landscape is riddled with inefficiencies, delays, and non-payments, especially for smaller players. Payment processes and flows have proven inadequate, causing considerable headaches for contractors and subcontractors. Small contractors, often reluctant to voice their concerns, are forced to finance projects, exposing themselves to significant financial risks. Recent research shows that 36% of these small businesses heavily rely on credit cards, with 33% depending on personal savings, far exceeding other sectors.

Across the pond, the USA has implemented measures to protect subcontractors and suppliers, resulting in a cultural shift where contractors take responsibility for paying their subcontractors. But in the UK, this isn’t the case. In fact, it’s still one of the only places where diverting and using others’ money without consequence is a common practice.
Now, the UK has tried to take measures by introducing Project Bank Accounts (PBAs). However, they have yet to extend to private sector projects, leaving small businesses vulnerable to financial misconduct.

There’s also the issue of the working capital gap, where contractors often have to carry the cost of delivering on a works contract before they receive their own payments, which is exacerbated by Project Bank Accounts (PBAs).

Can Digital PBAs with Embedded Finance be the Solution?

The current state of construction payments resembles a “Buy Now, Pay Later” model, without the proper controls and risk management to ensure that the ‘pay later’ happens, with small businesses carrying the cost to ‘float’ projects using inappropriate and expensive finance products.

There is hope as innovative approaches, such as digitised Project Bank Accounts (PBAs), emerge. These modern systems ring-fence funds and keep them safe from main contractor diversion and business failure, meaning subcontractors will still get paid even if the main contractor’s business collapses. With this huge payment risk removed finance can be seamlessly integrated into the entire payment process. The ultimate goal is to ensure that payments reach contractors of all sizes at all levels of the supply chain without unnecessary delays or complications. The adoption of embedded finance will eliminate the need for expensive and high-risk financing products, ultimately relieving small businesses from the financial consequences of repaying loans even if they don’t get paid.

Final Thoughts

Looking forward, we foresee a wave of innovative fintech solutions tailored to meet the specific needs of construction businesses. These solutions, like ProjectPay, should prioritise solving payment issues from the small business perspective rather than focusing solely on larger contractors.

By reshaping the payment landscape, improving financial well-being, and boosting productivity, these innovative solutions will continue to revolutionise the construction industry.

Advancing Payments in Construction: A Look at Modern Solutions and Practices

The construction industry faces complex challenges in managing payments, impacting stakeholders ranging from multinational construction firms to local suppliers. Louise Stewart of ProjectPay emphasizes that the management of cash flow and timely payments is not just a financial procedure but a vital aspect of project management that affects the economic stability of the entire sector. This article delves into the intricacies of payment practices within the construction industry, examining current strategies and regulations aimed at enhancing these processes.

Payment Processes and Regulations

Standard Payment Procedures

In construction, the payment process is influenced by various factors including contract terms, project variations, and economic fluctuations. The Housing Grants, Construction and Regeneration Act provides a legal framework to ensure regular and timely payments across the supply chain, mitigating cash flow issues for all parties involved. It’s crucial for construction companies to adhere to these guidelines to maintain stability and trust within the industry, a point Louise Stewart frequently advocates for in her work with ProjectPay.

Impact of Regulatory Changes

Recent enhancements in payment regulations, such as the Prompt Payment Code and the Duty to Report on Payment Practices and Performance, have significantly reshaped the payment landscape in the UK’s construction sector. These reforms are particularly beneficial for SMEs, which are more susceptible to economic pressures and benefit greatly from improved payment practices. Louise Stewart sees these regulatory changes as a step forward in creating a fairer payment environment for all businesses.

Industry Challenges and Advances:

Late Payment Issues

Late payments are a longstanding issue in construction, compressing margins and leading to liquidity crises. Initiatives by organizations like Build UK have made strides in addressing these problems by benchmarking payment performances and reducing average payment times. Such measures not only help in adhering to payment deadlines but also encourage a culture of prompt payment, which is essential for the financial health of the businesses involved. This aligns with Louise Stewart’s vision for more reliable payment systems through ProjectPay.

The Role of Transparency and Peer Pressure

Transparency in reporting payment practices, though sometimes uncomfortable, has proven effective. It fosters a culture of accountability, encouraging companies to meet their payment obligations timely. This peer pressure has led to improvements in internal billing processes, particularly benefiting SMEs that often bear the brunt of delayed payments, a concern that Louise Stewart addresses with ProjectPay’s innovative solutions.

Forward-Looking Strategies:

Advocacy for Fair Payment Practices

Continuous advocacy is necessary to ensure all construction entities, including public sector bodies, adhere to fair payment practices. This includes meeting payment terms consistently and implementing robust mechanisms to handle payment disputes and enforce late payment fees effectively. As Louise Stewart from ProjectPay argues, strengthening these areas is essential for maintaining a healthy and equitable payment culture in construction.

Need for Simpler Reporting Systems

Simplifying reporting requirements by aligning them more closely with practical needs could enhance compliance and operational efficiency. This adjustment would support the adoption of real-time digital payment methods, which can significantly speed up the flow of funds and reduce administrative burdens. Louise Stewart advocates for these changes to facilitate smoother transactions and improve overall business operations in the construction industry.

Evolution of Payment Methods

The shift towards more streamlined payment systems has necessitated the integration of modern solutions like BACS Payment Services, which facilitate faster actual payments, reducing delays associated with traditional cash payments. Advance payments and the handling of payment applications have become more predictable and secure, reducing the risks of slow payments that plague subcontractors and suppliers. Louise Stewart sees this progress as essential for the immediate financial health and future robustness of construction businesses.

Addressing the Costs and Complexities of Construction Projects

In the realm of construction, managing the cost of materials and the average cost of projects is intrinsically tied to effective billing processes. The introduction of precise construction contract terms that include stipulations for late payment fees can deter the frequency of late payments. Furthermore, ensuring bills are paid on time is not just a courtesy but a financial imperative that significantly impacts the overall cash flow and financial stability of a construction business. Louise Stewart emphasizes that tackling these payment challenges head-on is crucial for reducing project delays and enhancing contractor relationships.

Enhancing Communication and Compliance

Effective communication, facilitated by regular phone calls and meetings, plays a crucial role in maintaining transparency and ensuring compliance with payment terms. This is particularly important when dealing with subcontractors for construction work, who often bear the brunt of payment delays. Additionally, proper handling of National Insurance and other statutory requirements is essential to avoid legal pitfalls and ensure that all financial obligations are met promptly. Louise Stewart promotes this comprehensive approach, which not only streamlines the financial operations of construction projects but also safeguards the future viability of businesses within the industry.

Conclusion

Effective payment management is critical for the sustainability and growth of construction businesses. By adopting advanced payment solutions like construction payment software and by fostering a transparent payment culture, the industry can address current challenges and prepare for future demands. Ensuring robust payment practices will not only stabilize individual businesses but also enhance the overall economic resilience of the construction sector. Continual improvement in these areas is essential, requiring a collaborative effort across the industry to uphold standards and adapt to new challenges. Louise Stewart’s innovative efforts with ProjectPay significantly contribute to these developments. In line with such innovations, C-Link offers a cutting-edge payment platform designed specifically for the construction sector. Book the C-Link demo now to explore how it can streamline your payment processes and drive your business forward.

About Louise Stewart

Louise Stewart is the Founder and CEO of ProjectPay, the trusted digital payments platform for the building and construction industry globally. Originally from Perth, Western Australian, her mission to solve the broken payment flows that result in widespread payment abuse of small businesses in project supply chains, whilst helping the sector to transition to Net Zero has led her on a journey around the world.