Small construction firms face cash flow demolition
Small construction firms are being severely limited by decisions from larger contractors to delay payments, the Specialist Engineering Contractors’ Group has warned.
Building companies must deal with an “unsustainable” cash flow burden and the business group added that Brexit, a lack of funding sources and customer delays are further complicating the situation.
It is claimed that larger contractors are trying to protect and improve their own standing by delaying payments to their suppliers which is having a knock-on impact on the supplier chain.
“The major problem is the tightening cash flow position of the very large contractors,” SEC Chief Executive Rudi Klein explained, before adding that the situation is not showing signs of improvement.
According to The Times, a government review of ‘retentions’ in the construction industry is expected in the coming weeks – this process sees finance held back, supposedly as protection should sub-contractors not return should defects need to be rectified.
The SEC said this provides major contractors with a means of delaying or withholding payment and added that it can take months for suppliers to overcome the issues they face – around £3 billion is understood to be currently outstanding in the UK.
Meanwhile, The Times say the review will look to ensure that larger firms cannot use finances from suppliers to protect their balance sheets while also limiting any money that can be lost to insolvency procedures.
Accessing finance has become more difficult for small firms as a result of tighter bank regulations too, which has only served to aggravate the situation.
The warning from the SEC follows research from Funding Options that revealed that directors lent construction firms £38 million from their own pocket to cover operational costs in 2015-2016.
If construction firms are unable to source alternative finance options to assist with cash flow difficulties, then they may ultimately require administration or insolvency measures if something goes wrong.
To address the issue of late payments on public sector construction projects, the SEC has said that project bank accounts should be made mandatory, therefore helping to ensure that suppliers across the chain receive payment for goods and services.
By Phil Smith