What can construction suppliers do to protect themselves from failure?

Insolvency statistics for Q3 2023 released this week show that overall, company failures are 10% higher than in the same period in 2022. The construction industry suffered the most insolvencies with 18% of all failures by sector.

Pressures on the construction industry

It will not be a surprise to many that construction firms are struggling against the backdrop of high interest rates, continued supply chain issues, an erosion of profit margin caused by inflation and a fall in housing demand due in part to the cost-of-living crisis.

The recent failure of a number of large head contractors due to the reasons above have been well publicised, but what is often overlooked is the effect that their demise has on smaller subcontractor creditors who often suffer a bad debt.

The industry also runs on standard form contracts which can be complex to understand and administer, and under which failure to follow the detailed process can have detrimental consequences.

How can risks to construction suppliers be minimised?

However, all is not lost, there are steps subcontractors should follow to mitigate their risk of losses, including:

• Regular project valuations and invoicing – and collecting the money
• Rigorous awareness and application of contract terms, in particular in:
  • quantifying and claiming for extra contractual work
  • following the strict process (serving notices etc.) in the event of late payment
  • use of the adjudication procedure where available

And if your debtor goes bust?

In the event of an insolvency, affected firms who have supplied goods should immediately seek to identify them and review their trading terms for any retention of title clauses which may allow the recovery of goods to reduce their loss.

VAT charged on sales that form any debt which is unlikely to be recovered may be reclaimed on the next VAT return under VAT bad debt relief.

At this point final claims in the insolvent estate may be submitted to the appointed insolvency practitioner. This may eventually result in a return in the form of a dividend.

How do we help construction suppliers?

If your business has suffered cashflow issues following the failure of customers in the construction industry or if you have concerns that it may be about to, please contact our business restructuring team for early expert advice.