Avoiding unpaid bills in the construction industry

Construction DebtPatrick Blake outlines the best approaches to avoiding a common problem in this sector.

As the saying goes, ‘cash is king’, and cash flow is key to the smooth running of any business.

Ensuring a regular and undisturbed flow of payments is critical to business survival.

However, this can be particularly problematic in the construction industry, where maintaining relationships with clients is important, but timely cash flow throughout the supply chain is crucial. 

So what tools does a construction company have at its disposal to assist it in avoiding unpaid bills?

Know your client

First and foremost, it's common sense to familiarise yourself with your client (whether it be the ultimate employer, or perhaps a main contractor) and their payment record. 

If you've had problems getting paid by them in the past, you should carefully consider your future exposure. If the client is new to you, consider carrying out a credit check or making other enquiries as to credit worthiness. 

Seek security for payment 

If your client will agree, forms of payment security such as advance payments, bonds, the use of escrow accounts and parent company or personal guarantees can all be effective in minimising payment risk.

Retention of title clauses can also provide certain security in respect of goods that have not been paid for, although they can be difficult to enforce.

Know the law

The Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (commonly known, thankfully, as the Construction Act) gives parties performing works or services under a construction contract numerous rights. Indeed, one of its very purposes was to increase cash flow in the construction industry.

If you have a construction contract as defined by the Construction Act, certain provisions must be included in the contract (and if they are not, terms will be implied), including:

  • A right to interim payments: where the duration of the work exceeds 45 days.
  • A right to payment in the absence of certain notices: the paying party must ensure that payment notices are issued and has the opportunity to issue pay less notices within specified time periods. If it does not issue one or both of these notices, the contractor may be entitled to payment of the sum claimed in its application in full, at least in the short term.
  • Right to suspend: if the client fails to pay, the contractor may suspend performance, provided it has given the client seven days' notice of its intention to do so.
  • Interest: you may be entitled to interest on late payments either under the terms of your contract, or pursuant to the Late Payment of Commercial Debts (Interest) Act 1998.

Know your contract

Although the Construction Act requires certain provisions to be included in construction contracts, and the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended) (commonly abbreviated to the Scheme) implies terms if anything is missing, every contract is different and it is essential that you are familiar with the specific detail and requirements of your contract.  

Ensure that you read and understand the payment mechanism and process and that you are on top of the dates for monthly applications and services of notices. 

Read and comply with the provisions relating to applications for extensions of time, loss and expense, variations and so on. Some contracts place a time bar on applications for extensions of time and/or loss and expense, with the effect that if you fail to submit your claim within the stated time period, you will lose your entitlement. All of these can impact on cash recoverability and cash flow.

Take action

Make cash collection a priority in your business, and think about the following:

  • Communicate: this is key, as non-payment issues can often be quickly resolved by addressing any of the client's concerns, and providing any missing information.
  • Cash collection process: implement your own debt recovery systems and have mechanisms in place for chasing debts each month, including letters, statements and follow-up phone calls. 
  • Letter before action: if you're not getting a favourable response, considering sending a more formal ‘letter before action’, indicating that action will be taken if the debt is not paid by a certain date.
  • Adjudication: take professional advice on whether to start an adjudication against the debtor. Adjudications can be particularly useful where the paying party has failed to issue the correct notices in the appropriate timescales.
  • Statutory demands: if a debt is not disputed, consider taking advice on serving a statutory demand on the debtor, seeking payment within 21 days.

I’s not always possible to avoid unpaid debts entirely, but with the right information and tools at your disposal, it is possible to keep them to a minimum.

About the author

Patrick Blake is partner and head of the construction team at Ashfords LLP.