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Avoiding ‘Bad Debt’ Through the Construction Supply Chain

February 16, 2016

Improving financial management in construction supply chains can mitigate the considerable risks of bad debts. What is the impact of measures such as the Construction Supply Chain Charter?

Bad debt is an ongoing reality throughout construction supply chains.

The amount of bad debt in this sector has risen significantly in recent years. 70% of businesses surveyed by The Vinden Partnership and Bibby Financial Services for their Planning For Growth Report released in February 2015 stating they had written off an average of £30,465 of bad debt in the last three years. This makes a total of almost £2 billion a year within the construction industry.

Construction now ranks as the highest industry for liquidations in the UK, according to official government figures. In the year ending Q4 2014, there was a total of 1,739 businesses in the construction sector that went into voluntary liquidation, with a further 578 companies that went into compulsory liquidation, according to figures from the Insolvency Service.

It is vital for businesses and contractors to be aware of key issues in subcontractor payment processes, and the measures that can help mitigate the risks on otherwise healthy construction businesses.

BAD DEBT CONTINUES DESPITE GOVERNMENT INITIATIVES

The government has implemented a number of initiatives to try to stem the problems of late or non-payment within the industry, with measures such as the Construction Supply Chain Payment Charter, the Public Contracts Regulations, and the Prompt Payment Code all expected to help construction firms.

The Construction Supply Chain Payment Charter has set a target of 30-day payment terms across the industry by January 2018. This is a laudable aim but is still some way off. That said, as of June 2015 a mid-stage target in the process reduces payment terms to 45 days from 60 days, which should go some way to alleviating the problem.

Of course, these measures don’t resolve the problem of companies missing deadlines and even refusing to pay altogether. Many companies feel increasingly stretched by rising labour costs, hikes in materials costs, fixed price contracts and sheer workload. Together, these factors are creating a perfect storm that slows down cash flows and can tip viable businesses over the edge. The Construction News barometer of 2015 showed that of the 32 major contractors surveyed, only 19% (or six companies in total) did not anticipate problems with contracted businesses. The majority, in fact, expected problems to cost them as much as £25m during this year.

CONTROLLING CASH FLOW IS KEY

Cash flow is the lifeblood of any business, and any company relying on the prompt payment of invoices needs robust controls in place at every stage of its construction projects to prevent non-payment. How a company does this is key to ensuring its survival and competitiveness in the marketplace.

Effective management and planning of contracts is a vital part of this process, and having the right software in place helps manage project finances. This in turn will make your project run more smoothly, and with less likelihood of penalties being incurred because of project overruns.

CLEAR AUDIT TRAILS HELP TO PREVENT BAD DEBT

Creating a clear audit trail of decisions and cost implications across the project, whether on site or at head office, will help to ensure any invoice queries can be resolved quickly and easily, making it clear where the responsibility for payment lies. The ability to track back through a chain of command, to identify that a decision was made by someone with the right level of authority rather than someone working alone on site, leaves no doubt about why that decision was made.

High level of financial risk management helps to prevent bad debt by ensuring there is no ‘blame game’ at play. However, it is often lacking, and in many cases this is because the companies working on the project are not communicating effectively in real time about what is happening.

CHOOSE THE RIGHT TECHNOLOGY TO HELP YOUR BUSINESS

Using the right software to allow very close control of any decisions made that have a financial implication, especially where a third party is concerned, will help to prevent invoice queries when the time comes for payment.

When it comes to a software solution, there is no ‘one size fits all’ panacea, but if you want to stop bad debt becoming a major risk to your business, then putting the right technology and procedures in place is essential.

TAKEAWAYS:

  • Find out how to implement robust controls to help reduce or prevent bad debt.
  • Reduce the likelihood of project overruns and penalties by taking greater control over each of the parts of your business.
  • Put in place a full audit trail to ensure any problems can be identified and resolved before they create payment difficulties.

Follow best practice in financial management and stay in business. Download: Financial Control During Construction Project Scope Changes

Financial Control During Construction Project Scope Changes


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