Hardship for 100,000 SME construction firms

Subcontractors should credit check large debtors to avoid overexposure

Almost 100,000 small to medium-sized enterprises (SMEs) in the construction industry faced serious money problems in the first quarter of 2021, a study by business rescue experts Begbies Traynor has revealed.

The findings reveal that in the months leading up to 31 March, 96,067 British SME construction firms had either:

  • County court judgments (CCJs) of less than £5,000 filed against them
  • Experienced a decline in key indicators such as profit, cash flow, and net worth

Unfortunately, the report’s findings are unsurprising; they simply confirm the vulnerability of many subcontractors. Most building costs factor in contractors. In contrast, subcontractors are rarely factored in, so they tend to be the industry’s biggest casualty.

Furthermore, profit margins are reducing as costs rise in Britain. Inevitably some margins will disappear completely. As the weakest part of their supply chain, subcontractors are a particularly exposed because:

  • There are lots of them in a competitive marketplace
  • Very few subcontractors do proper due diligence

Too many subcontractors assume a contractor is stable, and overlook due diligence because they’re grateful to secure a big contract. But their business will collapse if the contractor fails, or decides not to pay.

Risk-taking subcontractors

For example, an entrepreneurial subcontractor with 1 job believes they have the capacity to take on another project. At this stage, the subcontractor doesn’t realise that securing the 2nd contract means they:

  • Will probably have to supply all the cash required to complete the job
  • Jeopardise their business by waiting until the project is finished to collect payment

The risk-taking subcontractor’s business will fail if the contractor:

  • Decides not to pay
  • Creates a dispute that delays payment of the completed project

The construction industry experienced increased activity in the first 3 months of 2021. However, the number of vulnerable SME construction firms grew 21 percent compared with the previous quarter. As a result, more than 250,000 jobs are at risk.

Traditionally, subcontractors are reluctant to credit check contractors and other large debtors. They fear losing out if the results deny, or cast doubt upon the prospective contractor’s credit-worthiness.

But moving forward, subcontractors will have to become more selective with the companies and people they offer credit. Sadly, greater scrutiny of debtors usually results in less turnover. Nevertheless, it is far better to suffer a reduction in turnover than an increase in losses.

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