Construction industry continues to suffer the consequences of bad debt

George Hay Chartered Accountants

Customers defaulting on payments continues to threaten the success of subcontractors, working in the UK construction sector, according to a study by specialist financial services provider Bibby Financial Services (BFS) and industry experts, The Vinden Partnership (TVP).[1]

The Subcontracting Growth 2018 research reveals that three-fifths of subcontractors (60 per cent) have suffered from bad debt in the past year, with the average firm writing-off £16,149 annually.

Across the entire sector, it is estimated that around £2.8bn of bad debt is written off each year.

Specialist Finance Director at BFS, Kash Ahmad, commented: “Bad debt occurs due to insolvency in the supply chain, protracted default or dispute and the issue is particularly challenging for smaller firms.”

“This puts a massive strain on these businesses, sometimes even causing viable firms to fold. For many, bad debt is the hidden cost of doing business.”

Figures also revealed that almost a fifth of subcontractors (17 per cent) said the most common reason for not receiving full payment was because of a customer going out of business.

A change in the scope of work part way through a project (8 per cent), concerns over the quality of work carried out (6 per cent) and disagreements over contracts (6 per cent) were also among the top reasons for companies not being paid on time, or correctly.

BFS found that the biggest single problem subcontractors reported was late payment – waiting an average of 44 days for payment in 2018, up from 42 days in 2016.

Helen Wheeler, Managing Director for Construction Finance at BFS, commented: “Making full and correct payment in accordance with contracts is a fundamental pillar of the Government’s Construction Supply Chain Payment Charter, but this simply isn’t happening.”

“Unless something more tangible is done, the growth of tens of thousands of small construction firms will continued to be stifled.”

Many subcontractors reported feeling that they had little power to change contract terms, with almost 60 per cent of those surveyed saying they could not influence contractors and had to accept the terms they were given or lose business.

Dealing effectively with late payments is crucial in maintaining the healthy cash flow that is essential for business survival. At George Hay, we can advise property and construction sector businesses on strengthening late payment procedures, to prevent late payments escalating, as part of integrated advice on helping them to operate more efficiently and cost-effectively. For more information, please contact us.