Mike Antis, vice president client services, Oracle Construction & Engineering, argues that the Prompt Payment Code needs technological back up to be completely effective.
In any other aspect of life, money and cash flow is a priority. It enables us to do what we want to do and it’s the lifeblood of a business. However, for the construction industry, payments management is often given scant regard, with many organisations still reliant on using paper-based, heavily manual processes – and the urgency to improve the process through technology is often lacking.
When you consider that GDP from the construction industry in the UK increased to £28,576m in the first quarter of 2019 and that there were 2.4 million construction industry jobs in UK in Q3 2018, it really highlights how important the industry is to the prosperity of the UK.
While these figures are encouraging, the construction industry faces a long-standing and serious challenge in the health of its project supply chains. This health can be viewed in a number of ways, from a high-level look at the strength of the relationship between supplier and owner and/or main contractor down to a more specific look at financial health of individual entities in the supply chain, many of whom are small businesses.
To date, there are more than 2,200 signatories to the code across all industries, but in Q1 2019, 17 businesses were removed or suspended for failing to pay suppliers on time, with a large number of these from the construction industry. Why is this the case?– Mike Antis, Oracle Construction & Engineering
Much of this financial health depends on payments and cash flow for these suppliers which rely on these funds to pay employees and other expenses and, simply put, to remain in business. The government has taken a keen interest in payment practices, not just in construction but across all industries. To that end, in 2008 it introduced the Prompt Payment Code, which is administered by the Chartered Institute of Credit Management on behalf of the Department for Business, Energy and Industrial Strategy.
Signatories to the ‘code’ undertake to:
- Pay suppliers on time
- Give clear guidance to suppliers
- Encourage good practice
To date, there are more than 2,200 signatories to the code across all industries, but in Q1 2019, 17 businesses were removed or suspended for failing to pay suppliers on time, with a large number of these from the construction industry. Why is this the case?
Same same, but different
Much has been written about the construction industry falling behind other industries in terms of technology adoption, but much has changed of late and we see digital transformation really picking up in the sector. Unfortunately, in the UK, that growing trend toward digitisation has not, in most cases, included payment management.
There are a number of reasons why construction has not followed other industries in turning to technology to solve its supply chain payment management challenges, including inertia, a lack of willingness to change and, perhaps most frustratingly, a lack of understanding about solutions available and what they can offer.
Collaborative, cloud-based payments solutions provide a streamlined approach to this much overlooked area of business and can boost operational efficiency, improve visibility – and accountability – around payment status for all stakeholders, and ultimately lead to teams utilising their resources on more productive areas of a project.
A modern payment system using technology can significantly improve payments outcomes in three main areas:
Risk mitigation: it helps to protect suppliers from late payments by reducing cycle time and accelerating payments. It preserves audit trails to capture things like user actions, electronic signatures and payment documents. The system can also aid contractors in managing their adherence to the Construction Act.
Efficiency gains: it helps to automate as many processes as possible relating to billing and payment. This, in turn, enables businesses to do more with the same, creating resource capacity by reducing time spent on administrative elements of the payments process and enabling those resources to focus on value-add activities.
Transparency: it focuses on the importance of certainty and control as well as how visibility across payment processes not only ensures a healthier supply chain but also reduces supplier/vendor conflict.
The balance of change and disruption
For many businesses, changing such a crucial system such as payments and billing can be a frightening thought. Often it comes back to that need for control, to know that the business is on top of the flow of money but also that the system used can be accessed by all the different people in the business who need it.
That’s where technology comes in. A payment management system that is cloud-based provides much greater visibility and true stakeholder collaboration in a shared cloud workspace which also allows for document version control. At the same time, open APIs (Application Programming Interface) enable them to integrate with multiple systems such as enterprise resource planning and accounting systems to help expedite implementation and smooth out communication with existing tools.
Payment challenges in construction are long-standing, but they are far from insoluble. Technology can enable the right levels of efficiency, transparency and control that are needed to ensure payments are made properly. It’s time the industry realised that digital transformation needs to happen holistically so that all stakeholders can benefit from technology advancement.
This is the only way to support a healthy supply chain and develop strong relationships with suppliers to ensure they stay in business and projects stay supported and on track.
While it’s great to see construction businesses committed to things like the Prompt Payment Code, it’s only by truly changing their mindset and approach to the way they manage payments that they will be able to fully comply with the requirements of such a positive practice for the industry.
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