Sources of Payment Delays

TOPICS OF DISCUSSION

(scroll over each topic and click)

The discussion started with everybody, around the table, from those representing design firms to contractors to suppliers to clients agreeing that payments were a pressing problem in the interior design world of the Middle East. Some alluded that it was global, while others pointed out that the Middle East was approximately 15 years behind regions like the UK in understanding how to manage credit.

A factor that came up almost immediately was how real estate heavily influences the interior design market in this region. “The business is based on investors and how to organise the market for these investors and take care of their interests,” one stakeholder pointed out.

The solution is seemingly straightforward – to err on the side of caution with projects involving bad paymasters. But that is where an even more significant issue lies – the lack of transparency of a company’s credit history. In countries like the UK and USA, readily available resources such as the Dun & Bradstreet business rating reports clarify a prospective collaborator’s finances. Although Dun & Bradstreet has a franchise in the Middle East, they do not offer the same services – but there are other similar service providers in the region.

Platforms such as Etihad Credit Bureau and Trevex offer financial background checks and a credit report with a nominal fee. However, making a credit report available is not the mandate. For instance, if a supplier asks for a credit report on a contractor (for which the latter has to pay), the contractor can work with another supplier who doesn’t demand credit clarity. Ultimately, one can either depend on the account statements provided by the entity in question or rely on word of mouth as the primary source of credit checks.

Next, there is a perceived tussle between the commercial and financial departments within an organisation . Even with poor peer reviews or an unsatisfactory credit report, commercial departments within an entity might push working with defaulting companies to maintain toplines. The influx of newer and leaner (in reference to team size) companies in the market comes with services at cheaper rates. Cut-throat competition between contemporaries in the field results in a highly opportunity-hungry market.

Often, services offered at lower rates do not translate into better qualifiable services. In such a case, on one side, more scalable and experienced and quality-oriented companies suffer heavy losses, and on the other, the novices, who are out-of-touch and not an insider of the community yet, go through bad experiences when the clients turn out to be bad paymasters.

“The top 20% of the supply chain are less well-versed than the bottom 80% – and they are the ones whom we need to educate. One of the reasons that people don’t want to let go of a project is because you’ve got endless competitors, and people are cutting prices to the point where you’re probably working for break-even projects,” a speaker said, as a matter of fact.

Hurdles in pre-qualifying are one part of the problem; there are other roadblocks to secure payments post-project procurements.

Back-to-back payments are commonly referred to as one of the most common evils in interior design payment. In this discussion, it was discovered that back-to-back payments are a double-edged sword. Entities refuse to collaborate if they are informed they won’t be paid on a particular project unless the client has cleared the dues. This would make perfect sense in an ideal world where each stakeholder delivers services diligently, and no mishaps occur. Sadly, that’s different from the reality and lapses in providing services mean that clients can withhold the payment amount, even if only one service provider (e.g. a subcontractor or a supplier) is substandard. Keeping in mind that a main contractor works with the same suppliers and sub-contractors across other projects, there is little to no choice left but to disperse funds received from one project into multiple – otherwise, main contractors risk sabotaging relationships.

The downside is that clients who have yet to make payments aren’t motivated to pay, and timely-paying clients aren’t benefiting from doing their due diligence. The funds are distributed unevenly amongst projects.

It would fare well if main contractors decisively pressed pause on projects if payments haven’t gone through; however, in a regional field where the only method of credit check is through profiling clients via building relationships within competitors and throughout the construction network, there is a more significant, and holistically more taxing price to pay.

This is a segway into another concern – the upkeep of relationships is imperative to profile clients before taking up a job and can be a slippery slope while asking for payments. Citing the conundrum, a designer said, “You don’t want to start a relationship with someone saying, ‘I’m not going to give you the concept design until you give me the payment for concept design’, because then they say, ‘Well, what if I don’t like it?’ You often deliver something in its entirety, and I have invoices outstanding for nine months, ten months, a year.”

Assuming one remains cautious – they secure credit checks and have a systematic approach where the funds between projects with on-track payments and projects with delayed payments are negligibly dispersed. Still, unforeseen and unaccounted-for changes mid-project could delay timelines and payments. One such situation is when the representative from the client’s side is replaced. Starting the project with one set of decision-makers, with whom all the collaborators have developed a rapport and reached an agreement – and then continuing with another panel of decision-makers midway can be gruelling on schedules. The new representatives question the progress made, re-review the documentation and doubt whether the other stakeholders are colluding. “We may not see red flags in the bidding process because we don’t know what’s coming up,” a participant avered.

Another woe from those lower in the supply chain (sub-contractors, suppliers, equipment providers) is that the first payment goes through smoothly. The consecutive balance payments need to be followed up. After being constantly badgered to deliver timely services, the materials aren’t signed off or installation and delivery teams are sent back because the site is not at the correct stage. Consequently, the poor organisation and failure to follow through with schedules are reflected in payment timelines – requiring service providers to follow up even though the delivery was prompt.

It is not uncommon for stakeholders to remain uncompensated years after project completion. A major contributing factor is the lack of set precedent. Participants referenced regions like the UK and the USA, with strict laws for payment defaulters in the construction industry. European governments also make credit reports publicly available on portals like Dun & Bradstreet. Other initiatives include publishing government-issued blacklists and giving the entities time to improve their credit rating. There need to be more support systems or guidelines in the region. Even financial institutions like banks do not offer specialised solutions for the construction segment here, and the industry populous has to make do with one-size-fits-all bank guarantees or letters of credit (LCs).

In dire situations, stakeholders have taken the legal path and appealed to a court of law. There are cases where it works out in favour of the plaintiff, but in other cases, even after winning the verdict – there is no means to impose it. “There is no fear factor. There is no mechanism to enforce a verdict if the party in question has no means to pay. Sure, they will be sent behind bars, but that still doesn’t pay the bills.”

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