The construction industry is no stranger to insolvency.
Although the number of construction insolvencies is down on last year, it is still the highest industry sector seeing many companies forced out of business. Contractors, employers and consultants need to be able to identify the warning signs of an impending insolvency and protect their position as best possible. The issue of late or non-payment has left the construction industry grappling with a cash flow crisis.
With much of the world experiencing a significant downturn in construction output, large players are just as much affected as smaller players, and the issue is far from a UK domestic one. It is also not limited to small projects or to the house building sector.
In 2014, it was estimated that Britain’s army of small and medium-sized building firms lost out on £2bn every year as clients failed to pay for work. Some 70 per cent of construction companies, employing up to 250 staff, wrote off an average of more than £10,000 each year.
Businesses of this size make up the vast majority of the UK’s 280,000 construction companies. Annually the entire sector contributes around £90bn in gross value added to the UK economy and supports 2.93m jobs. Work is often contractual and many areas give opportunities for disputes resulting in payments withheld or delayed.
Despite receiving prompt payment as a first tier supplier, some bigger companies have the reputation of not paying their subcontractors promptly. Many often have to wait 60 to 90 days for payment.
This practice is a way of large companies accessing cheap finance by holding back payments whilst those further down the food chain have to borrow to survive.
Prevention is better than cure. There are actions you can take to avoid bad debts:
- Don’t be afraid to ask for payment
- Be organised. Always invoice promptly
- Always follow up invoices promptly if unpaid
- Each follow-up should be progressively stronger
- If you still don’t get paid, stop working and adding to the debt
- Employ a solicitor or debt collector
- If you are not comfortable with credit control, outsource the job
- Consider using invoice finance – it helps cash flow
- There are invoice finance lenders who specialise in construction
- Consider taking credit insurance which insures you against bad debts
The problem of delayed payment for goods or services causing problems from SMEs is not restricted to the construction industry. This year, insolvency profession trade body R3 revealed late payment for goods or services was a primary or major cause of 23 per cent of insolvencies in the past 12 months. While the failure of a supplier or customer was the primary or major factor in 20 per cent of cases.
So although a business can have a great product and great staff, if it doesn’t get paid for what it sells, or if it is over-reliant on one supplier or customer, things can go wrong very quickly. The problem has worsened since 2014, when a previous survey found that late payment was a primary or major factor in 20 per cent of corporate insolvencies. According to the Insolvency Service, there were 15,958 in the past 12 months.
Previous research by R3 found that 6 per cent of UK businesses, equivalent to 113,000 firms, were creditors in an insolvency last year. More than half of insolvency practitioners identified construction as the sector with the worst record for late payment.
Meanwhile, Britain’s 3.3million sole traders lose a total of £8.1billion a year from late, delayed or underpayment, research has found. Self-employed traders lose out an average of £2,472 each per year. Three in ten sole traders – about 990,000 businesses – have written off a payment in 2016, compared with 23 per cent of those surveyed in 2015.