This week on the Bibby Blog, Helen Wheeler, Managing Director of Construction Finance talks about the issues plaguing the sector.
Many commentators talk of the construction industry being in ‘rude health,’ with year on year output increasing by 2.4% and a steady increase quarter-on-quarter. Similarly, the Construction PMI has remained in positive territory. For outsiders looking in, there appears to be plenty to celebrate.
But take a look under the bonnet and you find that issues like late payments, bad debt and killer clauses are crippling smaller firms who are largely at the mercy of large contractors.
Bad debt is particularly prevalent for construction SMEs, who are often more exposed to the threat of overtrading or overexposure to single debtors. Meanwhile killer clauses, which are unfair or onerous contract clauses, can lead to late payment or no payment at all –the forfeiture of payment for hard work at a moment’s notice.
The Government has a moral responsibility to raise awareness of these issues so we can see our small businesses thrive. Thankfully we are seeing this happen on the crucial issue of late payments.
The newly-published Enterprise Bill offers SMEs whose clients fail to pay them on time free mediation services to settle the disputes. The Bill also includes the introduction of a small business commissioner whose role will include signposting businesses to the mediation services available. These are positive steps and should be a boost for SMEs operating in construction.
For now, however, the onus is on SMEs to avoid becoming a victim or a sad statistic. There are some steps sub-contractors can take to mitigate risks to their business:
- Check all contracts thoroughly to ensure you understand each clause and their potential impacts.
- Agree additional work with written instructions and agree additional costs upfront.
- Manage your customers’ expectations, including notifying them of any possible or likely delays.
- Get your cashflow in order. Firms with a ready supply of working capital are less likely to come unstuck due to the impact of killer clauses or bad debt.
- Secure bad debt protection for peace of mind. Many firms opt for construction finance, which enables them to continue to trade, pay wages and win new contracts, while they wait for payment. With bad debt protection businesses still receive the money owed, even if customers fail to pay or become insolvent.
These simple steps could be the difference between failure and survival for the small business owners in our crucial house-building sector.