The UK’s construction sector has suffered some serious setbacks in recent years. Sub-contractors have, by and large, been hardest hit, suffering from penalty clauses and construction contract disputes with larger firms. As a result, these smaller companies are writing off bad debt to the tune of nearly £3.1bn every year.
Fuelled by economic uncertainty, the construction industry is becoming increasingly volatile. It’s a tough environment for both companies and building projects to survive in. Situations involving delayed payments beyond 90 days are not infrequent. It’s now critical, more so than ever before, for sub-contractors to intensify their liquidity and maintain a robust, positive cashflow. This will help mitigate the risks associated with bad debt and resolve any contractual conflicts in good time.
Digging a hole
Construction contracts all include specific mechanisms to protect suppliers and sub-contractors from bad debt and ensure timely payment. However, when a dispute does arise, most smaller firms don’t feel brave enough to challenge their larger employers. A fear of jeopardising potential, future work and revenue drives this.
Set-off clauses are common in many contracts. They provide an express contractual right of set-off. For the payee, this clause can actually result in a loss of controlled cashflow and leave the company in a vulnerable position. This is often the case when there is a high level of debtor concentration. In this instance, a claim or issue on one contract, can wipe out any monies rightfully owed on other contracts.
Fortunately, there are ways to get the payment that is owed and protect the business.
The building blocks
To avoid construction contract disputes, it’s absolutely imperative to review all contractual clauses carefully before signing. The next step is to diarise the key dates as specified in the contract payment schedule. For example, application submissions, valuations and payments all have specific deadlines and any deviation from these dates can result in non-payment. A payee should look out for whether the payer has issued a payment notice on the specified date if not then the application for payment becomes automatically due - provided that certain basic conditions are met. Subsequently, should the payer fail to submit a pay less notice, then they will have no defence to the claim if the full sum is adjudicated.
Of course, avoiding bad debt in the first place is the ideal situation. This requires a high level of financial risk management. The importance of putting robust controls in place throughout the contract cannot be stressed enough.
1. Create a clear audit trail on each contract (especially regarding variations and instructions) so that any invoice queries can be resolved quickly and easily.
2. Know where the responsibility for payment lies and demonstrate when, why and by whom a decision outside of the scope of work (as specified in the contract) is made.
Bad debt insurance is also a valuable option to consider.
Concrete financial assistance
At Nucleus, we provide construction finance to a range of sub-contractors to help them stay cashflow positive and mitigate any risks associated with bad debt. Our experienced in-house quantity surveyors and construction professionals assess each individual application for funding assistance as they are submitted – and assist with construction contract disputes and negotiations. Our team helps clients review the contracts with their employers and highlights any onerous terms. Plus, we maintain constant dialogue with our clients as the contract unfolds to ensure no disputes arise, and to flag any issues before they become a problem.