How to Spot High-Risk Customers in Construction

Published on 31^st January 2025

Late payments and bad debt are significant challenges in the construction industry. Spotting high-risk clients early can save your business time, money, and unnecessary stress. This guide provides actionable steps to help you identify potential risks before they become costly problems.

1. Analyse Payment Histories

Understanding a customer’s payment behavior is a critical first step. Look for patterns in how they handle their financial obligations.

• Indicators:
  • A history of late payments to suppliers or subcontractors.
  • Reports of missed or disputed payments in the past.
• Actionable Tip: Use industry-specific credit reference agencies (like ours) to access up-to-date trading experiences and payment trends.

2. Request and Review Credit Reports

A customer’s credit report provides a snapshot of their financial stability and creditworthiness.

• Key Insights to Look For:
  • What other suppliers have experienced. 
  • Declines in financial metrics.
• Actionable Tip: Opt for credit reports tailored to the construction industry, which often include details on trading performance and project histories.

3. Assess Contract Terms and Behavior

How a customer negotiates and adheres to contract terms can reveal much about their reliability.

• Warning Signs:
  • Excessive negotiation on payment terms or requests for extended payment periods.
  • Avoidance of clear, written agreements.
• Actionable Tip: Always insist on written contracts with clear payment terms and penalties for late payments.

4. Monitor for Signs of Financial Distress

Even reliable customers can face unexpected financial challenges. Stay vigilant for warning signs:

• Indicators of Trouble:
  • Delayed responses to invoices or queries.
  • Requests for revised payment schedules or upfront discounts.
  • Reports of legal disputes or insolvency filings.
• Actionable Tip: Regularly monitor all customers and their supply chains using credit monitoring services to identify early signs of financial distress.

5. Check for Disputes or Legal Issues

Ongoing disputes or a history of litigation can indicate deeper issues.

• What to Watch For:
  • Frequent disputes over project deliverables or payments.
  • Court filings or public records of legal actions.
• Actionable Tip: Review publicly available legal records and use industry resources to check for ongoing disputes.

6. Maintain Regular Communication

Building a strong working relationship with customers can help you stay ahead of potential problems.

• Why It Matters:
  • Open communication fosters trust and transparency.
  • Regular check-ins can uncover issues before they escalate.
• Actionable Tip: Schedule periodic reviews to discuss project progress and payment expectations.

Conclusion

Spotting high-risk customers in the construction industry requires vigilance, research, and the right tools. By analysing payment histories, leveraging industry-specific credit data, and monitoring customer behavior, you can significantly reduce your exposure to late payments and bad debts.

Want to learn more about assessing and managing credit risk in the construction industry? Contact us today or read our guide on preventing late payments.