The construction sector is plagued by late payments: Here’s how to protect your business

The construction sector, like many industries, has been hit hard by COVID-19.

Victoria’s lockdown saw major building sites reduced to 25% capacity, while smaller projects were limited to five workers or fewer, heavily impacting tradespeople, supply chains and cashflow.

Australia’s construction industry is made up of over 350,000 companies — 90% of which are small businesses.

The pandemic crisis has buckled the sector, and as Victoria and the rest of the country looks towards recovery, construction companies are now suffering another crisis: late and non-payments.

A new report by Illion reveals that during COVID-19, late payments have seen the sharpest increase in over a decade.

The average late payment time in construction is at 10.3 days, up 2.5% since June last year.

Illion’s CEO predicts that late payments could even bloat out to 20 days.

The longer a debt remains overdue, the less likely it is to be recovered. With late payments on the rise, small businesses and sole traders are increasingly at risk of non-payments.

In this economy, that’s a risk that many companies will not survive.

In Australia, we have what’s known as the Security of Payments Act. This is a mechanism for applicant creditors to recover money in the building and construction industry.

However, the processes under the act can be quite complex, often leading to expensive adjudication or filing proceedings.

For small businesses already in financial strife, many cannot afford to throw good money at chasing bad debts. However, there are preventative actions that every small business owner can take to avoid a payments tug-of-war.

Here are three ways to protect your business from late and non-payments.

1. Do your due diligence

In March 2020, the government introduced a new set of temporary bankruptcy laws that are in effect until the end of the year. Notably, the new rules:

• Allow companies to retain control with liabilities of under $1 million;
• Increase the debt threshold for creditors to apply for a bankruptcy notice from $5,000 to $20,000;
• Give debtors six months, rather than 21 days, to respond to a bankruptcy notice before a creditor can begin bankruptcy proceedings; and
• Removes personal liability for business owners that choose to trade while technically insolvent.

While the new laws give small business owners the chance to recover once the economy kickstarts, it also means that creditors need to be hyper-vigilant when assessing new or existing customers.

It’s never been more important to conduct pre-transaction due diligence on the commercial trading health of a business.

You can do this by requesting a potential debtor to fill out a credit application form or trade reference that details the financial health of their business. A quick online search will provide you with a basic template to use.

In this economy, it pays to take a ‘buyer beware’ approach, so ensure you do your research to safeguard the long-term financial health of your business.

2. Keep your contracts watertight

Detailed customer agreements are the backbone of preventative debt management.

This is particularly true in the building and construction industry, where companies must be clear on precisely what product or service they will deliver, and when a project will be completed by.

Payment terms are another important element.

In our current climate, it’s not unreasonable to ask for full or partial payment upfront. However, if that’s not an option, you need to ensure that you explicitly state a timeframe of when a payment is due, and the action you will take beyond that point.

Communicate your agreements in writing, and set up regular payment reminders to ensure your customer doesn’t have the opportunity to forget. Keep records of these interactions, just in case.

If you want to be extra cautious, it might be worth engaging a lawyer to create a contract template to guarantee a watertight agreement.

You want to give your debtor every opportunity to do right, while also protecting your business in an industry where late payments are seemingly part of the culture.

3. Learn from your late payers

Too many small business owners accept late and non-payments as part of doing business, however, when it comes to repeat offenders, it pays to take a look at the broader implications.

Research by Xero shows small businesses that are consistently paid late grow their revenue at three-times a slower rate than their paid-on-time counterparts.

This creates a knock-on effect, as late payees tend to pay their suppliers an average of eight days slower, damaging customer relationships and further fuelling the cycle of late payments.

Over 30% of small businesses spend an average of eight hours per week following up unpaid invoices.

Those in the building and construction industry typically do labour-intensive, time-consuming work, meaning they don’t have an excess of hours or energy to spend on payments admin.

If you continue to do business with late-paying customers, you need to find a solution to avoid repeat offences and long-term damage to your company. Consider implementing stricter payment terms, or making an automated payment method compulsory.

The research shows that small businesses need to do more to protect themselves from late and non-payments.

The construction industry will recover, however, don’t let poor invoicing practices turn your business into a COVID casualty.