8th October 2015
Small and medium-sized construction companies are currently owed seven billion pounds in unpaid invoices, which could hinder future industry growth. Here we look at how to prevent financial difficulties
The UK construction industry is able to stimulate both economic growth and employment due to its reliance on a vast supply chain. However, it continues to experience issues with cash flow and late payments, and has one of the highest levels of unpaid bills across all sectors according to research by the Asset Based Finance Association.
When a construction company is owed money it becomes difficult to capitalise on new opportunities as funds are unavailable. The impact doesn’t finish there, it has a knock-on-effect for the entire supply chain.
The seven billion pounds owed to construction companies has led to an increasing amount of bad debt across the whole of the industry. According to a survey carried out by BACS Payment Services Limited, late payment is the biggest threat to the survival of many construction companies in the UK. As reported on Building.co.uk “[A] survey of over 200 subcontractors by campaign group and advice service Streetwise Subbie found 89% of sub-contractors are having to wait over 30 days to receive payment from main contractors on private sector contracts.”
These late payments are further increasing the amount of debt within the construction industry. According to CreditSafeUK.com, “The total value of outstanding County Court Judgements (CCJs) currently held against construction companies is over £31 million...” This is leading to a rise in companies being listed within Creditsafe’s highest risk band, and it is this high risk and volatility that is resulting in lenders becoming reluctant to invest in the industry.
As Begbies Traynor, the UK’s leading Corporate Rescue and Recovery practice explain, “The construction sector has always proved difficult to lend to as many elements of their contracts are complex, subject to dispute and suffer from lengthy payment terms, making them high risk investments for the cautious banks, who had their fingers burnt during the last financial crisis.” Yet, a successful construction industry directly affects the economy, and for each £1 spent on construction output, a total of £2.84 in total economic activity is generated. It is therefore imperative for lenders to invest in this industry in order to continue to strengthen our economy.
In order to overcome difficulties with cash flow and late payments, construction companies need to have the means to effectively monitor, manage and maintain a successful operation. Here’s how ERP software can help:
Project estimates- Cash flow issues arise when you incorrectly estimate project costs. ERP solutions with a strong Contracts Ledger, such as NAVcontracts, allow you to accurately monitor committed, accrued, and actual costs against budgets and will identify any possible over runs.
Accurate forecasts- To ensure you know how much cash your business will need to survive over the next year you need to forecast your cash flow as far in advance as possible. Through the use of business intelligence and reporting tools as part of your ERP software solution, you are be able to create accurate forecasts, providing an accurate picture of your cash position now and over time. What’s more, you can monitor current cash flow and record details of late payers.
Manage resource- Through more accurate forecasting you’re able to effectively manage and minimise the amount of equipment and materials you have onsite, which reduces the amount of cash tied up in such resources. By using construction specific ERP software you can implement processes that allow you to automatically order in equipment and materials on a project, as and when you need it.
Automate tasks- With ERP you can streamline processes and automate tasks, such as sending reminders for due payments and chasing retentions due. This also creates a more productive workforce. Furthermore, these reminders can be documented and stored against a contact within the system, which can help if a contract goes unpaid and court proceedings occur.
ERP systems for construction not only have the ability to help with cash flow and late payments, due to the business controls that they provide, but can instil confidence with lenders, encouraging investment and increasing growth within the industry. These controls are due to the data and documents they can record, including receipts, purchase invoices and sub-contractor certificates, which can provide an accurate view of performance and profitability. Added to this, the ability to provide accurate information on the work that has been completed along with what has been applied for has the potential to improve both the certification and payment process.