Published by business funder Bibby (BFS) and industry experts, The Vinden Partnership (TVP), the Planning for Growth report reveals that over 70 per cent of SME construction firms have suffered bad debt over the past three years. The average amount scrapped by these firms during this period was £30,465, equating to £1.9 billion each year across the sector.
Helen Wheeler, managing director of construction finance at BFS, says, ‘Bad debt is a serious issue for many construction businesses and represents a huge leakage in terms of sector output. Non-payment can occur due to customer insolvency, payment default or dispute and the issue is severely problematic for smaller firms who have often already footed the bill for labour and material costs.
‘This places a massive strain on these businesses, often causing viable firms to fold. The problem is particularly acute for those who do not have sufficient working capital or bad debt protection in place to cover against this situation.’
Wheeler adds, ‘Even if the business isn’t crippled in the long term, this £10,000 could be invested into growing their business or taking on an apprentice.’
Lee Ryan jointly runs a flooring business Phil Ryan Flooring with his father. He was forced to write off £2,700 when his customer stopped trading.
‘As a small company, writing off thousands of pounds had a big impact on the business,’ he says. ‘Our cash flow was quite badly affected and it created a lot of uncertainty at the time. As a partnership, we’re quite vulnerable and if we didn’t get paid for some of our jobs, it would potentially wipe us out. Now, have bad debt protection to reduce the risk.’
According to official figures there are 280,000 construction businesses in the UK, employing an estimated 2.9 million people.
Peter Vinden, managing director of TVP, says payment disputes are a routine part of the construction sector. Vinden says, ‘Disputes and litigation are a common occurrence in the industry, but often smaller firms and subcontractors do not have either the legal expertise or financial resources to pursue action which would ensure they receive the amount owed from customers.
‘Furthermore, clauses imposed by larger contractors are becoming increasingly onerous and this is a significant issue for many of the businesses we speak with. There is also increasing evidence of contractors seeking extended credit from the supply chain and the number of adjudication appointments is showing a sharp increase in payment disputes.’
BFS is urging smaller firms to seek expert advice in relation to reviewing contracts, credit checking customers and protecting their businesses using methods such as bad debt protection.
‘It’s vital that owners look to protect their businesses against the risk of bad debt. There are expert advisors and specialist construction finance providers who can help,’ Wheeler concludes.