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Subcontractors write off £2.8bn in bad debt

Subcontractors wrote off around £2.8bn in bad debt last year, according to research by Bibby Financial Services (BFS).

Its 2018 Subcontracting Growth survey of 250 subcontractors found that construction firms were writing off an average of £16,149 a year.

BFS specialist finance director Kash Ahmed said: “Bad debt is a serious issue for many construction businesses and, across the entire sector, more than £2.8bn is written off each year, representing a significant economic leakage.

“Bad debt occurs due to insolvency in the supply chain, protracted default or dispute, and the issue is particularly challenging for smaller firms that have already footed the bill for raw material and labour costs.”

BFS found that the biggest single problem subcontractors reported was late payment.

Subcontractors waited an average of 44 days for payment in 2018, up from 42 days in 2016.

However, just over one in four firms reported typically waiting more than 55 days to be paid.

In addition to waiting longer for payment, almost 80 per cent of respondents said getting paid the full amount was also a significant problem.

The most common reasons for subcontractors not being paid to terms were customers going out of business, the scope changing during a job, quality of work being queried, and contract disputes.

FMB chief executive Brian Berry said payment problems had been normalised in the industry.

“Poor payment practices, including the abuse of retentions, have been accepted as standard in the construction industry for too long,” Mr Berry said.

“Retentions themselves, because of the difficulty in chasing them, are themselves too often written off as bad debt and this situation needs to change. The time is right for radical reform.”

BFS managing director for construction finance Helen Wheeler said government efforts to improve payment practices were not working.

“Making full and correct payment in accordance with contracts is a fundamental pillar of the government’s Construction Supply Chain Payment Charter, but it is clear that this simply isn’t happening,” Ms Wheeler said.

“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.

Some 15 per cent of respondents said they had experienced some degree of impact from the liquidation of Carillion in January.

However, almost half said they had concerns about the financial stability of main contractors.

Mandatory payment terms on public contracts were supported by more than 80 per cent of firms.

Wider use of project bank accounts was also backed by almost 60 per cent of respondents.

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