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Can digital systems make late payments a thing of the past?

Taking the digital leap to managing contract payments will help to alleviate risks in the construction industry

Can digital systems make late payments a thing of the past?

Payment has always been a hot topic of debate in the construction industry – and with the government’s Construction Playbook putting emphasis on ensuring fair and prompt payment, the discussion is unlikely to go away anytime soon. It is widely agreed that construction is still a way behind when it comes to digitisation but taking the digital leap to managing contract payments will help to alleviate risks and ensure timely payments. Our Director and NEC4 co-author, Dr Stuart Kings, discusses.

When a company is not paid on time, this has an onward impact, meaning that payments further down the supply chain may be late or missed due to the subsequent cash flow issues that may arise. For small businesses, this could be the difference between staying in business or going bust.

 

Looking after our SMEs

 

This is highlighted even further when we examine the ongoing impact of the pandemic on the financial situations of SMEs. Data from insolvency practitioner Real Business Rescue’s latest Business Distress Index for Q1 2021 reveals that 96,067 SMEs in our sector are considered significantly distressed – up a startling 21 per cent from the previous quarter.

We particularly cannot afford to lose SMEs within the construction sector. They play a central role in building the future, but also in the delivery of real, localised social value too – making sure that our work passes on true, real-life benefits to local communities.

It is crucial that as a collective industry we are all paying promptly and fairly, particularly when it comes to the SMEs in our supply chains – and indeed this is one of the areas that the government’s Construction Playbook has highlighted. But just how do we meet the challenges?

 

Effective collaboration

 

As with many issues facing our industry, the answer lies in effective collaboration – with cloud-based technology being the effective delivery mechanism.

Construction is well known for talking about collaboration, and indeed most contracts – like the NEC suite – are specifically designed to help parties collaborate and manage their projects. Indeed, the reason for the latest NEC update was to provide governance and surety on the financial aspect of construction projects for contractors and clients alike.

However, the true collaboration and efficiencies are unlocked when contracts are managed digitally. This is where contract management software comes into play. It moves us away from managing contacts the old-fashioned way with lots of paperwork and room for error. It creates an easy, central means of project management providing visibility and access to all parties involved and gives the control everyone needed to make sure all payments are handled properly.

 

Having strong management systems

 

Management systems – like our Contract Manager – allow us to fully manage the payment process and act as a portal to manage finances throughout the entirety of a project.

When we consider the different contract types that will be used across the industry, the benefit of easy-to-use online systems become obvious. For example, there is a key difference between the NEC3 and NEC4 Engineering and Construction Contracts (ECC) in triggering payments.

Under NEC3 ECC, the Project Manager previously had to assess the payment whether or not an application for payment had been made. However, under NEC4 ECC clause 50.4 the Contractor is obliged to submit an application for payment in order to receive said payment, otherwise the amount due is paid at the previous assessment rate or lesser amount that the Project Manager assesses.

If the Contractor does not submit this application, it may not be entitled to payment for that assessment interval – meaning that the actual payment may not accurately and fairly reflect the work delivered.

Any good management system will allow and prompt all parties to do what is required under that contact, including submission of the application for payment and certificates.

 

Time management

 

Finally, we must remember that many contractual payment terms are subject to ‘time windows’ and how a digital management system can provide clarity on the all-important dates attached to any actions or contractual obligations.

For example, new wording in NEC4 ECC’s clause 53.1 dictates that the Project Manager makes a final assessment of the final payment amount due, which could be up to four weeks after the Supervisor issues a Defect Certificate, or 13 weeks following a Project Manager-issued termination certificate. A final payment is then to be paid within three weeks of the final assessment – or a different period if stated within the Contract Data.

A digital management system will provide clarity on what dates actions are carried out – such as the issuing of a Defect or Termination Certificate, meaning it will be easy to see and hard to dispute any missed timespan terms attached to any contract. This digital clarity should also allow the benefit of easier dispute management, as well as lower levels of disputes raised in the first instance.

Ultimately, digital software is there to plug the gap that presents most of the risks around payments. communications and the other key issues facing construction companies today.

Uptake of digitisation has been growing fast in the UK – driven particularly by remote working during the pandemic. However, we must make sure that we are digitising back offices at the same rate as processes and technologies, which is where tools like contract management software really show their strengths, allowing us to effectively work on all aspects of a project in one central system.

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