The construction industry has had its share of difficulties in recent years; Covid, interest rate rises, supply chain shortages and increasing costs, the ATO aggressively collecting tax, fixed price contracts, etc. However, these difficulties don’t apply only to the building industry, so avoiding or managing them should also apply to other industries or businesses.
Before taking on a significant new client or project, do your due diligence. Obtain a paid credit check, ask others if they know the business prospect, ask if they pay promptly, check website comments and reviews, and do an internet search. This is a start only, there may not be much readily available.
Set your Credit Limits
Let’s assume this will be a major client and you’ll incur significant costs (for materials, labor, contractors) before you are paid. Invoicing is one thing, receiving the money is another. What if you don’t get paid, will you remain solvent? What about your health and well-being, would you have to sell your home? Set credit limits per customer, clearly communicate them, put them in the contract or engagement, and stick to them.
You don’t have to accept the customer’s terms (“We pay 30 days after the end of the month”), payment could be every 10 business days to help both parties with cash flow. It’s harder to find good trades, contractors, and staff so builders and customers will negotiate.
A contract is legally enforceable, so read through any contract offered. Don’t assume all contracts are the same. Has it been reviewed by a solicitor who will point out his concerns to you? If using your contract and it is refused, could that be a clear message of intentions?
The Personal Property Securities Register (PPRS) has been operating since 2012. It is a way of protecting your business if your customer does not pay, and makes you a priority creditor, even ahead of a ‘retention of title’ clause. A low-cost, online, simple system that should be used more if you sell on consignment or terms, or are in construction. (Too much to explain here).
Invoicing and Debt Collection
Invoice regularly and promptly, don’t be so busy this is postponed. Then, be diligent in the collection. Keep records of phone calls or emails, documents need to show a consistent collection system or pattern, showing that this is what you always do to collect money owed.
If a customer goes into liquidation the trustee can claw back payments made to you in the past 6 months. If it is clear that you obtained money as a preference before other suppliers, a defense of the liquidator’s claim will be difficult. It helps that you have a ‘collection system’, there is nothing special or preferential about this payment, so a clawback may possibly be avoided.
If money is owed and the customer says to finish the current work so ‘we all get paid’, you have to think hard about this. Are you throwing good money after bad? If your customer has always kept his word or stayed within the terms, perhaps half now and the balance including current work when they are paid, and ask when that will be (ask for proof).
Some customers are demanding, unreasonable, bad-payers, and probably not profitable for you. Identify them quickly and seek a way to part company (‘we don’t take on that work anymore’, ‘our terms have changed and are not negotiable’).
When a large builder or customer goes bust, it affects many others and they may in turn also face bankruptcy. It may be just an easy way out for the customer, and the liquidator and secured creditors will be the only ones to benefit. It may be possible to protect your assets but this takes time (months) to arrange and be effective. It may be possible to negotiate a settlement with creditors. All of these are more costly, but perhaps avoidable provided the proper groundwork has been put in place.
These same planning principles apply to construction and other businesses. For a start, pay fair rates and pay promptly so people will work with you. Also, be clear about your expectations, communicate well, be professional in your business operations, and above all be organised and have reporting systems that give you information (not just pay taxes).