Inside story: late payments


13 August 2019
In the first of an occasional series, a well-known industry figure gives a personal view on a topical issue. In this edition, we look at late payments and what action is needed to protect businesses.

When I sat down to write this article, I deliberated many times on the potential consequences that my words would have for those that read it. I work in an industry where late payments are commonplace. So much so that our business now has the potential to achieve its first trading year in more than a decade with no bad debt. We see this as a major success. That isn’t good enough and is cause enough to write some strong words about the situation that our industry finds itself in.
An end-user should not be able to take delivery of a building where plant, machinery and equipment has not been paid for.
I still remember my first experience of late payment. I could not compute why the agreed terms were not being adhered to. Two months later the business experienced our first debt and it was a significant blow. We had effectively lent money to someone/a business because we knew and trusted them. They had been in business for 10 years. What could possibly go wrong?

We paid for that equipment and, in our eyes, it was our property. Everywhere we turned, we received the same answer: “tough”.

As a business owner, many of the conversations that I have with clients are with regards to financial matters. The truth is that nearly all of my clients are experiencing significant issues with companies that pay late. Thankfully, over 95% of my clients pay within agreed terms, including those that have problems getting paid themselves. Keeping cash in their business is essential for them and this keeps them afloat. 

If you own a business and work within HVAC then it is almost certain that you have experienced some pain and have either had to fight to get paid, become dependent on late payers (which in turn potentially makes you a late payer), or have suffered from bad debts. 

If you are reading this and are preparing to start a new business in the HVAC sector in the UK, the sad reality is that you will have to manage late payments and bad debt. It comes with the territory. A website developer can simply switch off your website if you don’t pay them within their agreed terms. Your utilities can be cut off, the Inland Revenue can force legal action with little warning and your solicitor can cease working on your behalf if you don’t pay on time. 

A HVAC contractor cannot shut a site down if they have not been paid. If they threaten to leave site then they are in breach of contract and the client can simply employ another contractor to complete their work. Try to argue this in court and the HVAC contractor gets hit with multiple issues from their ex-client which can range from poor quality work on site, not completing a project on time, not following Health & Safety practice and not formally agreeing variations. There are too many variables for the typical HVAC contractor to defend themselves in a court of law. 

It is endemic within the construction industry and the habit shows no sign of improving despite the recent collapse of Carillion and the problems encountered by Interserve. One thing that these two companies appear to have in common is the reliance on government-funded projects. Do these projects not come with the promise of payment terms well below 60 days? In my experience, payments within 60 days are what makes industry and relationships work. Payments over 60 days are what makes industry and relationships collapse. 

No excuse
There is no excuse for late payments and there is a significant and moral difference between a small company not realising that they have had an electric bill for £500 compared to the same offering a free of charge, interest-free loan to their client for the installation of a large air conditioning and ventilation project. The small utility bill carries a threat and the large loan carries fear. This is a culture that we need to change and we need our government to act urgently to enforce legislation that changes the way that contracts are managed. 
  1. Contracts should not be awarded to contractors that cannot finance the works. Companies with £20k of assets should not be awarded £250k projects.
  2. Retentions need to be addressed immediately with legislation in place to work to a separate bank account type system.
  3. Late payment legislation needs to be addressed further by government. This has the potential to wield some power, but it will bring an end to any relationship and is too problematic to enforce. Speaking from experience, the court does not offer you a pleasant experience even if you are successful and the time and complexity required to complete the process is prohibitive. 
  4. Implement a Considerate Payment Scheme. What power for the FM company that is a member of both a Considerate Contractor AND Considerate Payer schemes?
  5. The T’s & C’s of the awarding contractor should not apply except for retentions. The installing company purchasing plant and therefore providing a loan should have their T’s & C’s protected by Government.
  6. The government should implement legislation that protects the supply chain. In the event of a contractor bad debt where machinery, plant and equipment is on site, that equipment has been paid for by somebody in said supply chain. An end-user should not be able to take delivery of a building where plant, machinery and equipment has not been paid for. In this instance, the end-user may have unconsciously taken delivery of the building and someone, somewhere, has added the supplier debt to their bottom line. That is simply criminal and we have a reasonable right to expect our politicians and industry to protect us.

Late payment as a culture within business does not need to exist. Our industry needs to change but we cannot force change without help from the government. What business owner has the time to mount a one-man war? 
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