It’s been a volatile few years for the construction industry, with rising inflation, global supply chain disruptions, labour shortages and fixed price contracts putting increased pressure on clients and businesses alike. However, there are options available for companies to avoid late payments, and potentially get paid faster
The construction industry faces a multitude of challenges within the current economic environment. Labour shortages in the construction sector mean that outstanding job vacancies have experienced unprecedented delays in being filled. This has been worsened by global supply chain issues creating shortages of building materials. When paired with an increased volume of building activity from government residential stimulus grants, companies within this sector are at risk of being overwhelmed.
Further, fixed price contracts continue to exacerbate these challenges, with contractual considerations for companies needing to be factored into cash flow projections. Companies are bearing the brunt of incurred costs above the fixed price on the contract.
When the factors driving up increased costs are largely beyond your control, how can construction companies avoid insolvency?
The problem of late payments in the construction industry
Outstanding invoice payments are frustrating for any company, but within the construction industry they are especially prominent, and can have adverse flow-on effects. In fact, analysis from CreditorWatch’s Business Risk Index shows that construction is the sector with the most late payments, with one in 10 (11.9 per cent) in 60-days arrears or more.
Unpaid invoices severely affect cash flow, which in turn adversely impacts business planning, including the ability to upscale and take on new clients, and suppliers. It can also put significant strain on capabilities to order more stock and pay outgoings. When time is wasted chasing unpaid invoices, accounts are not reconciled in time, and this adds to the already heavy workloads of employees. All of which put companies in the construction sector at risk of closure.
While the current rising-rate environment could be applying pressure on customers to hold on to cash as long as possible, to offset higher loan costs, such credit issues may be a warning sign of financial distress. Minimising a company’s risk exposure to debt is crucial in a volatile environment, so knowing which businesses are at credit risk is more important than ever.
How to prevent late payments and get paid faster
There are solutions for your business that may not only prevent late payments from occurring in the first place, but help companies receive payment faster, including:
Perform robust due diligence – You need appropriate risk assessment tools to make better credit decisions, and business credit reports can be a lifeline for companies in the construction sector. By performing a credit check on a business ahead of time, you’ll discover their credit history and credit score. Business credit scores showcase the reliability and creditworthiness of new clients and suppliers. If they have a history of late payments or defaults, it’s likely this payment behaviour could be repeated with your company.
Tools such as CreditorWatch’s RiskScore, also keep you informed about the health of Australian businesses. Using extensive data, RiskScore advises you which of your customers are most likely to default in the next 12 months, allowing you to make smarter decisions concerning who you engage with.
Proactive debtor management – Proactive assessment tools like CreditorWatch’s Payment Rating assist companies in making payment predictions about would-be clients and suppliers. By scanning B2B transactions to measure the time it takes companies to pay their suppliers’ invoices, you can gain invaluable insight into whether this could be a risky business to engage with, before they’re withholding payment on invoices.
An interactive trade program, such as DebtorLogic, can also allow companies to be proactive about identifying early warning signs of credit risk. You’ll gain insights into customer and supplier payment trends through data-driven analysis of a customer’s entire portfolio, highlighting the likelihood of their paying an outstanding amount. Further, DebtorLogic offers debt collection assistance, so you can prioritise collections to reduce days to payment.
Also, lodging a payment default can help see an overdue debt paid, as well as assist other businesses to avoid engaging with this client. A default will be reflected on a business credit history for up to five years. This should also be considered as a final resort, as not only can such conflicts end client relationships but alternative solutions, like those listed above, could encourage faster results.
Importance of transparency – In the current market, companies in the construction sector would do well to ensure they know exactly who they’re working with. This is where using tools to gain greater transparency can be fundamental in preventing late payment. Directors representing multiple associated companies with below average business credit scores can be challenging for owners to detect. Conducting director due diligence is essential to thoroughly assess the credit risk of a potential new client or supplier .
Finally, transparency reports, such as CreditorWatch’s Financial Risk Assessments, offer a comprehensive look into the financial viability of your customers, suppliers or contractors. Using ASIC records and exclusive trade payment data, you can view trends, ratios and explanations on key financial performance indicators.
By knowing payment behaviour and risk factors ahead of time you can prepare finances for potential delayed payments from existing customers, and prevent engagement with new businesses that have higher risk levels. All of these tools combined can help companies to prevent late payments and see invoices paid faster.
Contact us today to hear more about how our suite of digital credit management tools can help you protect and grow your business.
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