Late payments leading to ‘cashflow crisis’ for small contractors

building stock 2Current cashflow problems in the construction sector are “unsustainable” as small firms are increasingly having to rely on directors for funding, the Specialist Engineering Contractors’ Group (SEC Group) has warned.

The group, which represents SMEs in the construction engineering sector, said late and lengthy payment periods from large contractors and a lack of access to reasonably priced lines of credit are to blame for the crisis.

SEC Group CEO, Professor Rudi Klein, said that these figures were extremely worrying.

He said: “With SMEs now relying more and more on their directors for their liquidity the cashflow position in the industry is now critical.”

The SEC said that research by Funding Options, a small business finance marketplace, showed that directors of smaller construction companies had been putting more of their own cash into operations. Directors lent small sub-contracting businesses £38 million in 2015-16, up 28% on 2013-14. The businesses included in the research include specialist trades such as electricians, plumbers, plasterers, decorators and roofing companies.

This is against the background of the poor state of the balance sheets of the UK’s largest construction firms recently highlighted by the debt-ridden problems faced by the nation’s second largest construction company Carillion.

Professor Klein added: “These companies are taking longer and longer to pay their supply chains with SMEs having to spend the bulk of their contract values up front before receiving any payment.”

SEC Group is calling for the issue of slow payment to be tackled through the mandatory use of “project bank accounts” on all public sector construction jobs. Suppliers would be paid from an account specific to the project they were working on. It stops suppliers at the bottom of the chain having to wait until those further up have been paid before their own bill is settled.

The contractors’ group is also pressing the government to introduce legislation to ring-fence cash retentions and make 30 day payments mandatory.

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