“Bad debt” currently affects more than a quarter of small construction businesses in the UK

Published on 30^th November 2018

Each year, construction businesses write-off thousands of pounds because of bad debt caused by late and non-payment. According to a study carried out by specialist financial services provider Bibby Financial Services (BFS) and industry experts, The Vinden Partnership (TVP) ‘Sub-Contracting Growth’ 2018 reveals that three-fifths of subcontractors working in the construction industry (60%) have suffered from bad debt in the last 12 months, with the average firm writing-off £16,149 each year*.

So, how do you mitigate the risks associated with bad debt and are you claiming everything you are entitled to?

Emma Miller, Company Director for Top Service has the following advice;

“The construction industry continues to be hampered by bad debt, the overall risk to your business is great given the complex nature of build projects and their reliance on a fluid supply -chain.  Ideally for the best chance of collection a debt should be no longer than four weeks overdue before passing to a third party. At Top Service we would suggest no more than three letters are sent in-house before you refer. If your customer has not responded to your requests, then they are most likely ignoring you and it will be prudent to refer swiftly into the next stage of your pre-litigation collection process. 

Where an invoice is not paid or is paid late, the Late Payment of Commercial Debts (Interest) Act 1998 allows you to claim interest and compensation and the Late Payment of Commercial Debts Regulations 2013 allows you to claim recovery charges above the compensation amount awarded. ” 

Are you claiming everything you are entitled to for bad debts?

“Interest claims for non-payment are split into two categories, contractual and statutory. Contractual interest must be stated in the terms & conditions and / or contract and agreed with the customer before the product / service is provided. 

The majority of construction businesses who are providing trade credit to customers will turn to the statutory interest legislation to ensure they are being compensated for late payment. 

The statutory legislation (Late Payment of Commercial Debts (Interest) Act 1998) allows for interest to be claimed at 8% above base rate and also a compensation claim of either £40, £70 or £100.00 depending on the value of the debt. 

The statutory legislation can be applied to business debts that are ‘late’ the Government outlines ‘late’ as being 30 days after either the customer receives the invoice or you deliver the goods/provide the service (if this is later than the customer receiving the invoice). Unless you have agreed longer terms to pay with your customer. In these cases, the debt would be ‘late’ after those agreed terms have passed.

In terms of raising invoices for these late payment charges, there is no need. You claim your interest and compensation on the gross amount of the invoice. Your customer should treat the payment of interest to you as they would bank charges. There is no need to raise a separate invoice for these charges. 

To enable your customer to process payments for interest and to ensure you are covering any required pre-action protocol should the need for legal action be necessary it is advisable to confirm you claim for interest within your chasing letters. If you are passing your case to a 3^rd party for recovery, then your nominated 3^rd party should do this for you. 

Can you pass the debt collection cost onto your customer? 

Any claims for your debt collection costs not claimed under the statutory legislation should be agreed within your terms & conditions and / or contract with your customer.  Under the Late Payment of Commercial Debts (Interest) Act 1998 you can claim a compensation figure, depending on the value of the debt you are collecting:

If your collections costs are more than the compensation figure you are claiming, you can claim the surplus under the late Payment of Commercial Debts regulations 2013. 

To help improve your chances of a successful collection for interest and / or charges and to meet any pre-action protocol required for legal action you should ensure any claims for interest, compensation and charges are ‘reasonable”.

For more information on debt prevention and recovery contact our expert team.

*https://www.bibbyfinancialservices.com/about-us/news-and-insights/news/2018/subcontractors-write-off-2,-d-,8bn-in-bad-debt-each-year