An annual average of £16,000 is being lost by each subcontractor as a result of bad debts and collectively they are forced to write off £2.8 billion each year. Research by Bibby Financial Services (BFS) found that three fifths of subcontractors have written off sums over the past year.
Moreover, findings from the Subcontracting Growth 2018 survey found that the average firm waves goodbye to £16,149 worth of bad debt each year. Undertaken following the collapse of Carillion, the study found that almost a fifth of subcontractors (17%) said the most common reason for not receiving the full amount billed was due to a customer going out of business. A change in the scope of work part way through a project (8%), queries over the quality of work (6%) and disputes over contracts (6%) were also among the top reasons firms would lose money.
“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,” said Kash Ahmad, specialist finance director at BFS.
“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. This places a massive strain on these businesses, sometimes even causing viable firms to fold. For many, bad debt is the hidden cost of doing business,” he continued.
Helen Wheeler, managing director for Construction Finance at BFS also added: “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. Unless something more tangible is done, the growth of tens of thousands of small construction firms will continue to be stifled.”