Up to £2.8 billion of bad debt is written off by subcontractors each year due to non-payments by customers, according to new research.

The 'Subcontracting Growth 2018' study by specialist financial services provider Bibby Financial Services (BFS) and industry experts, The Vinden Partnership (TVP), states three-fifths of subcontractors (60%) have suffered from bad debt in the last 12 months, with the average firm writing-off £16,149 each year.

The probe, which was carried out following the collapse of Carillion in January, revealed a a fifth of subcontractors (17%) said the most common reason for not receiving the full amount billed was due to a customer going out of business. Other reasons include a change in the scope of work part way through a project (8%), queries over the quality of work (6%) and disputes over contracts (6%).


In addition, more than two-fifths of businesses (44%) said that construction contracts are difficult to understand, with less than one in ten firms (6%) seeking expert advice.

Specialist Finance Director at BFS, Kash Ahmad, said: "Bad debt is a serious issue for many construction businesses and, across the entire sector, more than £2.8bn* is written-off each year, representing a significant economic leakage.

"Bad debt occurs due to insolvency in the supply chain, protracted default or dispute and the issue is particularly challenging for smaller firms that have already footed the bill for raw material and labour costs. This places a massive strain on these businesses, sometimes even causing viable firms to fold. For many, bad debt is the hidden cost of doing business."

Mr Ahmad continued: "Carillion situation has highlighted three fundamental issues in the sector: endemic late payment, bad debt and complexity of contracts. Each of these issues needs to be tackled by both the public and private sectors. However, there are also measures that small businesses can take in order to protect themselves against such issues. Such measures can include conducting thorough debtor reviews, seeking advice on contract negotiation and considering bad debt protection."

Helen Wheeler, Managing Director for Construction Finance at BFS, said unless something more tangible is done, the growth of tens of thousands of small construction firms "will continued to be stifled".

"Making full and correct payment in accordance with contracts is a fundamental pillar of the Government's Construction Supply Chain Payment Charter, but it is clear that this simply isn't happening."

(LM/MH)