Coping with bad debts in the construction industry 
(31/10/2007)
Following the award of the 2012 Olympic Games to London, an inevitable building boom will see attention focus on the construction industry and its ability to deliver such a massive undertaking. London 2012 will ultimately test the industry and stretch its resources to the limit.
At the same time, the Games pose a huge business opportunity for those operating within the construction industry. With 9,000 workers due to be on site at the peak of construction and 31 new bridges to be built, this is a project without precedent. Twice the size of Heathrow T5 in half the time, it will arguably be one of the biggest construction projects the world has ever seen.
Serious concerns have already been expressed by the construction industry that the project could be blown out of proportion. Plenty of figures have been banded around about the cost of delivering London 2012. With the budget trebling to nearly £10billion, the successful London bid has been attracting much controversy, only to be enhanced by rows over a diversion of national lottery cash to help plug a hole in the finances.
With so many areas of construction to be covered off, contractors and suppliers will inevitably have to face up to the perils of potential cash flow issues. Recent research has shown that the industry is subject to increasing insolvency figures and around half (46%) of the UK’s estimated 192,404 construction firms have no procedures in place to cope with late payment and bad debts.
These findings point to a worryingly relaxed attitude towards cash flow in an industry plagued by non and late payment issues. And, with such a big project on the horizon, it is of increasing concern that having no contingency plans in place to cope with bad debts means construction bosses may be gambling with their companies’ and subcontractors’ futures.
In today’s tougher trading environment, construction owners and managers need to ensure they have a more robust cash flow than ever, especially if they wish to work with some of the larger contractors on the Olympics construction project. Just as importantly, they need to ensure they have minimum exposure to financial risks. Any insolvencies higher up the chain can have a catastrophic effect on construction firms, and, in a worse case scenario, can even threaten their survival.
Vital for any business is maintaining a smooth day-to-day cash flow but, within the construction industry, the challenge can be even greater. The difficulties faced by construction owners and managers are quite different to the problems faced by other industries.
So, why is this? The construction sector, by its very nature, is particularly vulnerable, as firms need to buy significant amounts of raw materials up-front. In many construction projects, the amount paid out for raw materials and third party services can be exceptionally large and owners and managers often have to deal with staged payments, resulting in cash flow headaches.
Imagine this on the scale of the London Olympics project, with so many construction firms, contractors and suppliers working on every aspect of the build. Furthermore, the nature of the work itself is extremely labour intensive and contractual staff must be paid long before the business receives payment from the main contractor.
So, what can businesses operating within the sector do to ensure they have the funds to pay for raw materials upfront, pay staff wages and manage the gaps between doing the work and actually getting paid?
Until recently, the construction industry has suffered due to a lack of appetite from traditional finance providers to provide sufficient funding levels aligned with the flexibility the construction sector requires.
Now, solutions like Bibby’s Construction Finance package, developed as a direct response to construction market demands, provide integrated funding and collections services, and, crucially, bad debt protection, not only against invoices raised, but also applications for payment under a wide variety of contracts and orders.
The tailored finance solution releases up to 70 per cent of unpaid invoices and applications for payments within 48 hours, while the specialist bad debt protection provides real cash flow benefits as Bibby bears the brunt in the worst case scenario, ensuring construction companies get paid even if one of their clients’ businesses fold. The service also includes a fully comprehensive collections facility where outstanding payments are chased on the construction firm’s behalf.
Construction Finance was developed as a result of extensive research into the issues faced by the construction industry and an in-depth understanding of the framework within which construction businesses work. As such a finance solution, such as Construction Finance should be a consideration for those looking to successfully take advantage of the work on offer, to help ensure the London Olympics is a golden opportunity for their business.
Related categories: Construction services General Construction Heavy Construction and Civil engineering
