Cashflow problems are impacting the construction industry, and could potentially get worse in the government’s building boom. According to a new report from ProjectPay, the construction paytech, simply digitising payments isn’t enough to solve this issue.
This report was created following funding from the government’s innovation division, Innovate UK, and explores how cashflow problems in the construction industry can be solved. The ProjectPay findings come at a critical time for the construction industry as small and medium-sized businesses (SMEs) make up the majority of the sector (98 per cent), yet many are finding themselves in debt traps, paying high-interest expenses while they wait a very long time to get paid.
Currently, the UK has some of the highest numbers of builder collapses and some of the worst payment times in the world. After the collapse of ISG (September 2024), industry has warned that the late payments and insolvency crisis in the sector represent a significant threat to the government’s ambitions to grow the UK economy. Many in the industry are now calling for fundamental reforms and new payment models to address and prevent recurring financial misconduct and instability.
The report explains that the ISG collapse made a mockery of payment performance reporting which ranked ISG among the industry’s very best payers, when in reality subcontractors were owed large amounts and were battling to get paid.
To improve the situation for builders, the Prime Minister Sir Keir Starmer has committed to backing small businesses by unlocking barriers to growth, with the government committed to addressing access to finance and payment practices.
Parallels to Australia
In its report, ProjectPay notes that the economic impact of the UK’s building boom could be devastating for the sector if insolvency rates are not addressed. It draws parallels with Australia in 2024, when government investment caused insolvency rates to skyrocket to their highest rates on record. This government investment is now being investigated in Australia due to the disastrous results and billions in losses to taxpayers in creating a ‘profitless boom’.
Louise Stewart, CEO of ProjectPay, explains: “These building grants damaged the industry with thousands of builders collapsing, leaving many Australians and small businesses financially ruined. It contributed to the severe housing shortage, creating one of the most unaffordable housing markets in the world. Warnings from industry experts were ignored, we cannot let the same happen in the UK.”
ProjectPay is already being used on government projects in Australia and is being rolled out on public entity projects in the USA (where ProjectPay is poised to capture a segment of the $2trillion payments volume). ProjectPay is working with UK government departments looking to replace PBAs and to deliver an industry-supported technology solution that eliminates late payments, reversing insolvencies and providing SMEs with much-needed cashflow.
UK analysis
The Government’s new Procurement Act, which passed last month, mandates for government projects to report on contractor payment performance across the length of their supply chain. It is now a key priority for government to access reliable payment performance data and to be able to enforce 30-day payment terms.
The report shows that projects using ProjectPay demonstrated the platform’s effectiveness in providing validated data and guaranteeing payments are made within the 30-day timeframe, providing easy compliance for tier-one contractors.
Selected tier-one contractors are being invited this week to participate in the next phase. Louise Stewart, CEO ProjectPay, said: “It is encouraging to see such commitment from the UK government in addressing this long-standing issue.
“The government is the UK’s largest construction client, they transact over £2billion in payments a year on construction projects (with plans to spend £650billion on public projects over the next decade); they want to ensure that this investment benefits the UK economy by creating jobs and prosperity, not more collapses.”
Report findings
Though it may seem like the obvious solution, digitising payments will not solve the insolvency problem, according to report. ProjectPay notes that outdated financial models and banking structures burden the construction industry with many small businesses unable to access low-cost or affordable working capital. The report also reveals that Project Bank Accounts, used by the government to provide some protections, are ineffective, costly and should be replaced with a superior solution.
ProjectPay also highlights the lack of regulatory support in the UK. It explains how the regulatory environment in the country does very little to provide security of payment in the sector compared to other countries: this could be a deterrent for private investment into the UK construction sector.
As a solution, the report recommends that the government’s ENABLE Build programme is modified to address access to capital for SMEs that operate in the sector, not just builders, and is delivered in a way that removes the government’s exposure to private sector losses in guaranteeing loans to builders.
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