Complete your details below to watch the webinar on-demand:
With insolvencies on the increase across the construction industry, the importance of ensuring fairer and faster payments and avoiding payment disputes cannot be understated. To help shine a spotlight on this, and how technology can be the panacea the built environment needs, Payapps’ Product Expert, Anthony Puma, joined industry leaders on a recent Construction Wave webinar, entitled ‘From Conflict to Collaboration: Building Trust in Subcontractor Payments’.
The thought-provoking discussion saw Anthony, Ian McIlwee – CEO of Finishes and Interiors Sector (FIS), and Kevin Sage – Fit Out Director at H&J Martin, join Construction Wave author, Danielle Kenneally, to highlight the challenges facing the construction industry and illustrate how the built environment needs to come together to promote fairer payments, increase transparency, and utilise technology to smooth the payment process for all involved in financial management.
The biggest challenges facing the construction industry
Contractors and subcontractors in the construction industry are under increasing pressure to meet tight deadlines while remaining financially secure. While the introduction of tighter subcontractor payment regulations and the associated transparency has looked to ease this pressure, Iain McIlwee revealed that these regulatory changes have added cost and time to the construction process. He said: “A lot of the regulation changes have manifested in higher risk buildings and gateways, but it is a profound change to the entire compliance landscape.
“So that’s certainly added cost and time to the construction process, and it’s had an impact on the marketplace. The gateways have really brought that market to a bit of a grinding halt. It’s causing all sorts of challenges more widely and the uncertainty is affecting the way that projects are coming through the supply chain.”
Anthony echoed this sentiment, revealing there is a decreasing level of patience across the industry when it comes to accessing information. He said: “I’m seeing a growing demand in many cases for instant access to information, especially in such a siloed industry. While you can order pretty much everything on your phone and track it right to your doorstep, people don’t always understand when they ask for stuff, they can’t get it immediately.
“We have quite significant productivity issues in construction. People don’t really have time for chasing and they want to see that clarity. They want to know what’s going on and are asking questions about why they can’t get that information immediately.”
With the UK currently in the midst of a cost-of-living crisis, Kevin Sage suggested cashflow is, and has always been, a huge factor in the construction industry. He said: “There’s still very much a ‘pay when paid’ attitude, probably as a way of reducing risk. Sometimes the main contractor can be quite wary about paying money out because they’re not sure if they’re going to recover money from the client.
“If you’ve got a good supply chain and a good rapport and history, that can be worked out quite easily. However, we’ve found we’re having to go out to the market more and more because the supply chain is just not out there. If the clients are slow at paying, it just stops the whole process.”
Iain McIlwee proposed the cashflow issues had been the reason why more contractors and subcontractors were relying on loaded credit. He said: “Businesses are relying on credit insurance companies through distribution and extending credit, and the rise of Amex is a worrying trend. All it takes is a couple of those lines of credit to withdraw and the cash wells dry up very quickly.
“You’ll have credit from your merchant put on your charge card to sort of push the payments as far away as possible, but things like credit and charge cards are things that would traditionally have been used as a buffer. I think we’re actually at the point where it’s an existential threat to the next chapter of construction.”
Construction adjudications on the rise
Webinar Chair, Danielle Kenneally, drew the panel’s attention to a report by King’s College London, which revealed construction project adjudications between May 2023 and April 2024 had reached an all-time annual high since the introduction of statutory adjudication in 1998. In fact, it saw a 9% increase from the previous year.
Kevin Sage was concerned about the rapid rise in fast-track adjudications. He said: “The increase has been frightening. A lot of it is smash and grab. You might want a quick resolution but quite a lot of times, smash and grab is won on a technicality.
“A subcontractor or a main contractor going after a client may not actually be entitled to the money but because somebody somewhere along the line has failed to issue a pay less notice or failed to administer some, the adjudicators will immediately jump to ‘you didn’t fulfil your contractual obligations’, and award the money.
“All it does is prolong the process. The idea behind them may be a quick adjudication, but they are very, very painful and I don’t know that anybody ever gets a wholly satisfactory result out of them.”
Iain McIlwee echoed these worries, suggesting the desperation for money was a key driver. He said: “If somebody’s doing smash and grab, it’s a bit of a scorched Earth policy. It’s no great surprise that adjudications are picking up. We take the smash and grab in a market with short cash.
“We did a report with Reading University a couple of years ago that looked at the way we contract and allocate risk. The overall conclusion of it was that the standard form contract is basically dead. We’ve ended up in a situation where risk is bundled up and passed down the supply chain. The quickest people to have reacted to the Building Safety Act has been the lawyers.
“In 2018, construction spent just over 2% of turnover on legal fees. That’s double the norm. So, there’s a real argument that we’ve overcomplicated our relationships and we’ve overly-lawyered up to compensate for that. While some adjudicators offer low-cost adjudication services, you’re still looking at 15% in terms of cash. So, even in a low-cost environment, it’s not no cost.
“I think that’s the challenge for adjudication. If everyone doesn’t like the decision, it still ends up in the courts. I think the intent through the Construction Act was brilliant and there’s so much in it that’s almost about right. But it really does need a bit of a refresh and an upgrade to support the relationships we have now.”
While industry leaders and the government are actively trying to improve the construction payment process and improve transparency through tighter regulation, the webinar debate illustrated there is still a long way to go. Iain McIlwee revealed: “We’ve got about 600 members and we’ve never run a survey where anybody’s reported any significant uptick in the improvement of payment processes. In fact, in the latest survey we ran, 20% say it’s worse.
“I think we have to emphasise how brutalised the supply chain has been. £850 million has been wiped out of the supply chain. About one in five firms are in financial distress. So, this sort of payment issue still sits very much at the core of the construction industry’s problems.
“We are expecting more on late payment regulation and the Government has made some pretty strong claims around what they’re going to do to tighten things up and provide more support for SMEs. But the reality is, up until now, nothing the Government has done has made any real difference to the way in which money is flowing through – that is something we need to correct.”
The importance of conflict avoidance in construction
In such a competitive industry, ensuring strong relationships between contractors, subcontractors and the supply chain is absolutely essential. With adjudications and payment disputes often putting these relationships to the test, the importance of identifying ways to avoid or quickly resolve conflict cannot be understated.
As a big proponent of RICS Conflict Avoidance Coalition, Iain McIlwee believed conflict avoidance should be an essential focus for the construction industry. He said: “I think we suffer from the fact there’s not one oversight body for adjudication. We need to find a quick and effective way of solving elements of disputes to stop them escalating and be more focused about where and how we use adjudication.
“The conflict avoidance process is something I would really point people towards, because it’s built on experience. It has been used by major infrastructure projects for quite some time and has seen demonstrably good results. The process is very simple but it comes back to the fact that we have a mechanism to take disputes out of the emotive here and now and deal with them through a mediation process.”
Kevin Sage underlined the need for better understanding and awareness of the processes involved. He said: “To help contractors avoid conflict and strengthen supply chain relationships, everybody needs to understand the payment mechanisms and the timings involved in it, whether that is in the standard contract or something bespoke between contractors and subcontractors.
“I do believe some sort of way of automating the process and providing prompts and automatic communications would help cut out a lot of the smash and grab adjudications.”
Construction technology is vital, especially when used collaboratively
Having seen an increasing number of subcontractors adopting Payapps’ digital payment system, Anthony suggested supply chains are evolving quite substantially, even if the contractors aren’t always aligned. He said: “We’ve seen quite an uptake in subcontractors that are using our system on main contractors’ projects. The contractors are probably still running very disparate, manual processes themselves. While payments are systemic throughout the industry, there’s a lot of blaming or pointing fingers at the main contractors who have their own hurdles to deal with.
“I think real collaboration is still a gap specifically in the construction systems process and people aren’t fully joined up. That does sort of create an ongoing challenge for everybody really.”
As a cloud-based system, Payapps can be used across the supply chain and helps contractors manage and certify applications for payment. Increasing accuracy and streamlining the process while reducing the potential for disputes and late responses, Payapps is increasingly being used by contractors across the UK and Ireland.
Anthony explained: “Whether you’re a very large main contractor or smaller subcontractor, Payapps ultimately brings that sort of structure, visibility, and consistency across the piece. It’s that central place for subcontractors to go to apply for their payment and submit their payments etc.
“All supporting evidence and any notes for the contractor to review are there available to view at all times. One of the biggest changes we see is a reduction in the mistakes and late responses. Applications don’t sit unseen in inboxes. Contractors tell us even simple things like just automating reminders as a subtle prompt for them to issue the notices on time, or for their supply chain subcontractors to make sure they’re issued, has made a huge difference.
“They precisely see where their application is along the process and get immediate notification when it’s certified. It takes away all the noise and the traffic that is normally involved in the ‘email tennis’.
“The platform greatly helps the benchmarking of supply chain performance and allows users to see certain trends to make informed commercial decisions while helping to strengthen relationships between contractors and their subcontractors.”
While the webinar highlighted the daunting challenges the industry is facing when it comes to improving cashflow and reducing the rising number of adjudications, it also illustrated the crucial role collaboration can have in overcoming these challenges and the promising potential for prompt and fair payments through the implementation of technology.
