The construction sector is particularly affected by late payments, because of the characteristics of its value chain but also because construction companies usually have the obligation to perform the construction at their own expense (material, machinery, personnel) before getting paid. The low profit margins in the sector are aggravating the problem and make companies vulnerable to cash flow difficulties. Late payment can thus endanger the mere existence of a construction company. A positive cash flow is essential to ensure the daily functioning of the company and to expand, invest and embark on new projects.
SMEs are particularly affected by late payment, but also large contractors suffer from late payment by their private or public clients. The latter play a key role in this respect as they trigger a “snowball effect” for the entire value chain to the detriment of main contractors and subcontractors.
In February 2011, the EU adopted the Directive on combating late payment in commercial transactions (2011/7/EU). The background of the Directive is that most goods and services are supplied on a deferred basis, i.e. the supplier gives the client time to pay the invoice. Although the goods are delivered and the services performed, many corresponding invoices are paid well after the deadline which negatively affects the liquidity and complicates the financial management of undertakings. Many SMEs even go bankrupt due to late payment. One of the main elements of the Directive is to entitle creditors to interest for late payments. Furthermore, the Directive addresses the length of payment terms with the aim of preventing the abuse of contractual freedom to the detriment of the creditor. As late payment is an issue in both business-to-business and public authority to businesses relations, both kinds of entities are targeted by the legislation. Regarding public authorities, slightly different rules are applied since they benefit from more secure, predictable, and continuous revenue streams than companies and obtain financing at more attractive conditions.
The Directive was to be transposed into national law by March 2013. Since then, several assessments have been carried out revealing that the impact of the Directive has been limited so far. Against this background, the European Commission is currently collecting information before determining on how to proceed with this issue.