The construction sector as a whole has writen off debts of almost œ2bn over the last few years, according to new research.
Published by business funder Bibby Financial Services (BFS) and industry experts, The Vinden Partnership (TVP), the Planning for Growth report found that more than 70% of SME construction firms have suffered bad debt over the last three years.
The report found that the these firms write off more than œ10,000 each when customers do not pay, adding up to œ1.9bn over the same period.
Helen Wheeler, managing director of construction finance at BFS, said:
“Bad debt is a serious issue for many construction businesses and represents a huge leakage in terms of sector output. Non-payment can occur due to customer insolvency, payment default or dispute and the issue is severely problematic for smaller firms who have often already footed the bill for labour and material costs.
“This places a massive strain on these businesses, often causing viable firms to fold. The problem is particularly acute for those who do not have sufficient working capital or bad debt protection in place to cover against this situation. Even if the business isn’t crippled in the long term, this œ10,000 could be invested into growing their business or taking on an apprentice.”
According to official figures, there are 280,000 construction businesses in the UK, employing an estimated 2.9m people – SME companies make up a large proportion of these firms.
Attempts by the Government to intervene and help solve the problem – the Prompt Payment Code and Construction Supply Chain Payment Charter in particular have received criticism with many firms questioning either scheme’s value.
Mal Bannatyne of Bannatyne Construction said:
“Late payment is a big issue in the construction industry. Too often, payment is withheld until the last minute, or even one or two weeks late. The Prompt Payment Code hasn’t helped and most businesses don’t take much notice of it.”
The report suggests that a practical plan to address the payment practices of larger firms is needed to ensure that smaller firms can continue to take on work, pay wages and invest in their futures. To do this, the Planning for Growth report says the Government needs to engage with these small firms to fully understand the issues faced, enabling an informed, rational and long-term solution to be reached. Without this input, its says measures will be seen as little more than token attempts to appease SMEs, as many view the Government’s current attempts to address the issue.
As well as late payment, skills shortages and Government red tape were found to be the biggest other challenges for subcontractors and small construction firms.
To view the Planning for Growth report from Bibby Financial Services and The Vinden Partnership, click here