The Guild News


New legislation tackling late payments

February 2020

A substantial step forward in solving the perennial problem of late payments is currently awaiting discussion in the House of Lords.

A private member’s bill – demanding a 30-day limit on settling invoices – has received a first reading, following its introduction to the House by Labour Peer Lord Mendelsohn on 21st January. At the time of going to press, a date for a general Lords debate on the bill had not been scheduled.

The bill’s aims

If it does progress into legislation, what changes will this bill bring to the construction industry?

The core of the proposed new law is a statutory limit of 30 days for settling all invoices. There will also be a blanket ban on the practice of expecting suppliers to be out of pocket in return for prompt payment. The bill also outlaws the system of large construction contractors charging fees to smaller firms to be included on preferred supplier lists.

For public sector works over £500,000 there will be a requirement to set up a project bank account.

Should the bill pass into law, the powers of the Small Business Commissioner will also be beefed up. This will serve to police the 30-day payment rule, as the Commissioner will be able to fine the worst offenders. Smaller construction firms would be able to take disputes directly to the Commissioner too, without first going through adjudication.

Origins of the proposed late payment legislation

The bill was drawn up by a cross-party group as a result of clear evidence that the ‘credit economy’ is causing increased pressure on cashflow further down supply chains. UK companies can barely survive, let alone thrive, if working capital is constantly choked up by an endemic practice of withholding payments for as long as possible.

Lord Mendelsohn, in announcing the bill, said: “The recent huge escalation in outstanding payments shows that decades of promoting ‘culture change’ has only made things worse. This bill will tackle the issue once and for all with a package of measures that is operable, impactful and measurable.”

The business ‘cost’ of late payments

For some small businesses – including construction firms – provider-client payment arrears can literally kill them off.

One study which was carried out for Tide (a banking platform) found that UK SMEs are chasing a combined total of £50bln worth of late payments.

Not only does this leave them short of working capital to help them prosper and grow, it represents a huge time burden. The same research found that the combined time spent by SMEs on chasing late invoice settlements could easily be reaching 900,000 hours a day [1]

The size of the issue is thrown into sharp relief by a 2016 study conducted by the Federation of Small Businesses. That UK organisation estimated that delayed payments cause 50,000 SMEs a year to go bust. This then dents the UK economy by an eye-watering £2.5bln a year.

There are many businesses in the construction sector hoping this bill passes into law in the UK quickly.

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