Credit terms and credit periods of construction companies : an analysis

Abstract

PURPOSE: The primary objective of this study is to examine the determinants of credit terms for Maltese Construction companies. This study analyses the current implementation of the Late Payment Directive, explores interviewees’ perspectives on the Proposed Late Payment Regulation and evaluates the influence of other external factors on credit terms. Finally, the researcher identifies potential measures Maltese Construction Companies could adopt to mitigate late payments. DESIGN: A qualitative research methodology was adopted for this study. Semi-structured interviews were conducted with 12 participants, consisting of 11 interviews with Maltese Construction Companies representatives and one representative from the Malta Association of Construction Management. FINDINGS: Credit terms for Maltese Construction Companies are based on the length of the client relationship. New clients are not granted similar credit facilities when compared to well-established clients, as first, an assessment of customers’ liquidity is essential. The Government determines credit periods for Government contracts, deferring payments beyond initial considerations by suppliers. Bartering and retainage clauses adversely affect liquidity and working capital for Maltese Construction Companies. Firms may offer credit period extensions to remain competitive against other companies, although the Proposal of the Late Payment Regulation may limit this flexibility of offering differing credit terms. CONCLUSIONS: The study concluded that trade credit offered by Maltese Construction Companies contributes to the maintenance of client relationships. However, implementing stringent credit policies should be prioritised as part of credit management practices that minimise late payment occurrences. Although the Proposed Late Payment Regulation is well-intentioned, its implementation may impose financial burdens on Maltese Construction Companies. IMPLICATIONS: This study identifies the key factors determining the credit terms offered by Maltese Construction Companies. The recommendations presented may help Construction Companies improve their credit management without harming their relationships with clients.