Civil Engineering Reference
In-Depth Information
withdrew credit or made it more expensive or diffi cult to secure, while
the tier 1 contractors insisted on longer payment terms and lower prices
from their supply chains. Given that tier 1 contractors' payment terms
from their clients had not signifi cantly changed, they were effectively
using the client and supply chain as their own credit facility and at the
same time insisting on discounts! Such actions tend to have a negative
effect on the weaker organisations in the supply chain. All business
organisations rely on the fl ow of cash and if that fl ow is restricted,
companies can very quickly become insolvent.
While the total value of national and international sales of tier 1 con-
tractors is very often equivalent to multi-million or even multi-billion
pounds sterling, the turnover of many of their tier 2 suppliers range from
only hundreds of thousands of pounds to multi-millions for the small
to medium-sized enterprises. These smaller organisations are not large
enough to employ a specialist fi nance director or dedicated fi nance
team. As a result, the large corporations adopt stringent fi nancial strate-
gies to improve their cash fl ows, while the smaller suppliers continue
to settle their invoices within the agreed terms, usually 28 days, and
pay their workforce, usually weekly. Over time this disparity leads to
cash-fl ow problems and fi nancial stress, and in some cases insolvency
and business failure.
These cash-fl ow issues are further exacerbated by the fragmented
nature of the production process, which is spread through several tiers
of different fi rms in the supply chain. Figure 9.4 highlights the paradox
that very often the last in the chain of payment is the fi rst in the chain
to commit to expenditure, although the diagram in Figure 9.4 very much
simplifi es the fl ow of orders and payments. The right-hand arrows show
the fl ow of orders and payments from the client down to the materials
supplier. The arrows on the left indicate the fl ow of transactions for
goods and services. For production to commence materials must be
delivered by the tier 3 supplier, who must then wait for payment. The
tier two subcontractor then assembles the materials on site and waits
for payment from the tier 1 main contractor, who manages the project.
The tier 1 contractor must then wait for payment by the client. Only
after work has been signed off does the client pay the tier 1 contractor,
who in turn pays the tier 2 contractor, who then pays the tier 3 supplier.
As a result the tier 2 and 3 suppliers can often wait longer for payments
than tier 1 contractors.
This model is a simplifi cation of the system of pay-when-paid payment
fl ows, assuming credit facilities are not involved to facilitate payment
