The Cashflow Blog

Construction subcontractors – bankers to the big boys?

In these days of economic uncertainty it’s quite interesting when pulling into a London train terminal to view the numerous cranes and new buildings changing the city skyline almost on a weekly basis. What is also interesting is just who is paying for all of these construction projects? If the recent news buzz surrounding the woes of Carillion is reflected throughout the industry then it certainly doesn’t appear to be the main contractor; well at least not for a substantial amount of the project time.

Brick wall

The payment terms to subcontractors insisted on by Carillion highlight the ongoing plight those smaller firms further down the food chain have to suffer at the hands of large main contractors.

A few years back Carillion opted to be part of then Prime Minister David Cameron’s ‘supply chain finance’ scheme (also known as reverse factoring) in order to support SMEs. It also took the opportunity to extend its standard payment terms to 120 days, a move the Department of Business, Innovation & Skills was keen to distance itself from, saying “it does not encourage the use of supply chain finance to extend payment terms”.

In effect Carillion’s suppliers have to pay a fee to a bank if they’d rather not wait four months to get paid.

Back on planet Earth the current news surrounding Carillion’s £800 million of debt and a pension black hole of £600 billion allows you to guess at the probable real motivation behind the decision.

Snagging

Reverse factoring is a useful and very workable method of speeding up supplier payments but it all comes back to what can be considered as reasonable terms in the first place. Carrillion boast that a great number of suppliers are now enjoying getting paid in 45 days. Cynics might say they are enjoying it by paying for and guaranteeing a loan to the main contractor.

Furthermore, 45 days may well be a whole lot better than 120 but if you’re paying wages on a weekly basis (and let’s face it weekly wages are still the norm in the construction industry) there is still a cashflow gap that needs plugging.

Second fix

For those SME subcontractors that would rather take back control of when they get hold of the cash required to keep going, access to finance for completed work (including uncertified applications for payment) is more widely available these days.

Specialists within the alternative finance industry spend time to understand the nuances of a construction project and will involve quantity surveyors to review contracts and ensure a workable solution can be matched with a sensible level of funding.

Most would agree that it is high time the government seriously applied the spirit level to the playing field that is the construction industry. In the meantime the alternative finance industry continues to help construction businesses gain a firmer cashflow footing.

by Steve Leeves