Late Payment to Subcontractors in the Construction Industry

Abstract

Late payment is a recurring issue in the United Kingdom construction industry. While the existence of the problem is well known, there is a dearth of quantified evidence on the extent of the problem from a subcontractor point of view. This research sought to quantify the extent of late payment and late release of retention and their effects on construction subcontractors in the UK. A research design including the analysis of payment data of 30 selected projects (355 payments) from a case study and a supplementary questionnaire survey with 21 subcontractors were used to investigate the issues. Late payment was observed in most of the case study subcontract projects (77%) and nearly half of the payments (46%), suggesting it is common practice. Statistical analysis showed that while there was no statistically significant link between payment delay and contract sum, subcontractors are likely to experience longer payment delays in projects with a higher number of payments. It was found that the late release of the second half of the retention posed an even more significant problem to subcontractors, with a considerable portion of the income (upward of 2.5%); sometimes the entire profit, being held up for nearly 2 months from the due date. The findings highlight that while the regulatory and contractual measures over time have sought to address the issue of late payment, it remains a prevalent issue and that subcontractors often fail to rely on such measures. This necessitates subcontractors to factor late payment into their cash flow planning. The authors suggest that the recent and proposed initiatives such as the project bank accounts, central retention deposit scheme, and smart contracts offer potential to mitigate payment delays. This research investigated the nature of payment delays from main contractors to subcontractors within the construction industry. While numerous initiatives have been undertaken, late payments to subcontractors is still a recurrent phenomenon and a norm in UK construction projects. These include significant delays in releasing the payments retained by the main contractor (money held as a means to encourage correcting any snags of subcontractors’ work) that need to be released when the work is complete. Current standard formal contractual provisions (such as interest payments for delayed payments or agreed payment dates) between the main contractors and subcontractors does not seem to have shown a significant impact on reducing payment delays. While the Construction Act in the UK has provided some encouraging regulations, they are less observed during the administration of individual contracts between the main contractors and subcontractors. The findings provide much needed quantified evidence of payment practices that can be reflected in developing regulatory, contractual, and administrative countermeasures in the UK and beyond. The information will also enable small and medium-sized enterprises (SME) subcontractors to plan for the cash flow problems they could encounter due to late payments. Further external finance handling mechanism enforced through legislation (such as project bank accounts) could be more effective in supporting subcontractors cash flow and financial resilience.