How subcontractors can protect themselves when builders hit financial trouble

The building industry is facing one of the biggest challenges in its history. It is no wonder, with government grants increasing demand, material prices skyrocketing and a very tight labour market. When builders have financial challenges, it is often the subcontractors who bear the brunt.

Top tips for subcontractors to protect themselves

1. Warning signs

   There are a few tell-tale signs that a builder is under financial stress. A few examples are not returning calls, paying bills progressively later and ‘word on the street’ from other suppliers that they also are having challenges being paid.

2. Credit check

   If you have one client who is a large percentage of your revenue, or a large total value, you should undertake a credit check on the organisation hiring you. In the grand scheme of things, the cost is minor, but it may prevent you from working with an entity that is unlikely to pay you.

3. Contracts

   You should be entering into signed, lawyer prepared (or at least reviewed by your lawyer) contracts with builders. Much work is undertaken through a handshake, but when the proverbial hits the fan, it is not what you know but what you can prove which is vital.

4. Terms

   Your terms and conditions should be complete, robust and (again) prepared by a lawyer. How many days after you issue your invoice are they required to pay? Is there interest payable on late payments? If the debt is referred to a debt collector, are the debt collector’s fees above and beyond your original invoice and payable by the customer?

5. Diverse clients

   You should have many clients and not one client which makes up a large (such as more than 20%) of your revenue. If your largest customer goes out of business and doesn’t pay you what is owed, would you be insolvent (not be able to meet your debts as and when they fall due)? If the answer is yes, you need to reconsider and adjust your client mix.

6. Diverse industries

   Like ensuring you have diverse clients; you should also consider being in diverse industries. Perhaps both residential and commercial. Perhaps government and private. Perhaps mining and construction. For micro businesses, this would be challenging, but for larger businesses, this is a must.

7. Personal Property Securities Register

   If you must leave equipment on a site while you are not there, it is worthwhile for you to investigate lodging a PPSR interest over that property. This will make life much easier for you if the builder does go into administration or liquidation and the site is locked up.

8. Accountant

   It is vital to have an excellent accountant and bookkeeper when running a business. Managing your cashflow, keeping accounts, chasing people who owe you, liaising with our friends at the tax office. All the ‘fun’ things you put off and usually never get around to completing.

9. Working capital

   Given these tough times, it is important that your business is not running on the smell of an oily rag. Keep some funds available in the business to keep you going in case a few builders are late in paying.

10. Debt collection

    You need to have robust debt collection procedures. In an ideal world, you should be getting paid prior to completing the work (or at least a deposit). If this is not possible, you need to monitor when invoices are due and action if they are not paid on time. Accounting software can automatically send out reminder emails if amounts remain unpaid. You should also consider stopping work on current projects until the overdue debts are paid.

It is up to you to be proactive to manage (or to engage an external party to manage) the above to protect your financial interests.