Penalty clauses and disputes with subcontractors lead to massive losses over unpaid work

Penalty clauses and disputes with contractors lead to massive losses

Every year UK subcontractors are forced to write-off more than £16,000 each, due to unpaid work, according to a new industry report.

The Subcontracting Growth report from specialist funder, Bibby Financial Services (BFS) found that smaller construction firms are at the receiving end of penalty clauses and disputes with main contractors and other firms over work completed.

According to the Office for National Statistics, excluding property developers, non-residential building, house building and civil engineering, there are some 198,000 subcontractors in the UK. Across the population of subcontractors, findings indicate that as much as £3.1 billion could be written-off as bad debt by the sector each year.

Helen Wheeler, managing director of construction finance at Bibby Financial Services, says, ‘The construction sector is characterised by high upfront costs and for this reason, unpaid work and debts that cannot be recovered are serious issues for both big and small firms.

‘The issue is particularly problematic for smaller subcontractors. Not only does it impact a business’s cashflow, it often prevents suppliers and workforces from being payed. In extreme cases, it can lead to insolvency, causing serious repercussions throughout the entire construction supply chain.’

Outlining reasons for not receiving the full payment for work undertaken, 16 per cent of businesses say they received an unclear brief from the contractor, while 14 per cent had to overcome changes to the work brief part way through the job.

Peter Vinden, managing director of construction specialists, the Vinden Partnership adds, ‘Disputes concerning the value of payments in the supply chain of both large and small projects remain a common feature of the UK construction industry.

‘Many subcontractors do not understand their legal rights or know what action they can take when facing payment difficulties. Subcontractors should never be reluctant to seek payment in full and on time for work completed.’

The research also revealed issues with checking contracts amongst the UK’s smaller construction firms. Almost two fifths of subcontractors (38 per cent) said contracts with larger businesses are too complex to understand, and over a quarter (27 per cent) said they need help checking contracts thoroughly to avoid exposing their businesses to potential losses.

Helen Wheeler concludes, ‘While it is positive to see the construction sector bounce back after an initial wobble following the referendum vote, it is clear that there is much more to be done to protect and support small construction firms in the UK.

‘Unpaid work continues to be a key issue for such firms and this represents a significant economic leakage, affecting both output and employment.’

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