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Insolvent Construction Industry Debt Collection

Construction industry debt collection is currently experiencing a large share of problems because of the sheer number of insolvencies.

For professionals working in the construction industry, it is of paramount importance to have payment terms very clearly defined, and to have systems in place for those who are managing the accounts receivable processes from industry leading software, to ensuring there is clear, frequent communication regarding bills payable, and the amount payable.

The Reserve Bank of Australia has recently said that there is a very serious risk of more residential construction companies becoming insolvent.

With December 2022 serving as a sign of the times, as in 2022 alone, 10 of the country's largest construction firms have gone into administration.

Among the reasons for insolvencies amongst construction companies include factors such as interest rates, the cost of a variety of different materials, staff illnesses and shortages, as well as weather issues preventing work taking place when it should, and also effecting some projects by needing additional work to be done to remedy weather related issues.

These factors exacerbated existing issues for builders, in the sense that fixed-price contracts were already problematic.

Among the above mentioned companies which have gone into administration include one which, in the years prior to it's administration, had made over $100 million per annum during the years immediately prior.

Construction Industry Debt Collection

If you are a subcontractor working in the construction industry in large scale projects, it is in many cases advisable to utilise Project Bank Accounts.

Further increase in the likelihood of being paid maybe found in the process of sending reminders of payment when invoices become payable, or even ensuring that, where partners allow, work is paid for prior.

According to research from the Payment Times Reporting Regulator, the ASBFEO discovered that businesses which operate in the manufacturing, retail trade, and construction sectors have been recorded as the worst for paying invoices on time, with a meagre 22% of large corporations and businesses paying small businesses and contractors within the specified 30 day payment period.

Further signs of current turmoil in the construction industry can be seen in comments from outspoken union representatives. One such comment of particular notoriety came from Olivier Judd, of the National Electrical and Communication Association (NECA) on subcontractors and their working and payment conditions, he said on why it is important to have proper measures in place for accounts receivables, “Subbies are taking on a disproportionate amount of risk on construction projects”.

The subcontractors must remain mindful of the fragility of the construction industry in light of the above mentioned variables, of most concern being increases in material and fixed price contracts, which in some cases, render performance of the initial contract as being unable to be performed.

While increases in materials and fixed fee contracts should not be of this much concern to subcontractors, they have little say over the agreement the contractor has entered into, and subsequently have no say over the terms that are included in this agreement.

In light of frequent insolvencies occurring in the construction industry, payment terms and other related processes are increasingly important for contractors working in the construction industry.

In some situations, the subcontractor is being paid less than what the legal fees would be to sue and try and recover unpaid debts.

In some cases, the subcontractors might be able to recover unpaid invoices through the hiring of a debt collection agency.

One legal and often effective way of collecting the relevant information needed to contact the debtor construction company, is skip tracing.

Construction Skip & Asset Tracing

Skip tracing is the process in which a debt collection agent attempts, in some cases in fact does, locate the individual that has become hard to contact. In this situation of insolvent construction companies, the individuals responsible for payment may have been let go, or they might be directed to focus their attention on different aspects of the company.

Skip tracing may be of assistance to subcontractors awaiting payment in the sense that you can bring attention to your unpaid invoice in another way, by sending the invoice to another relevant officer of the company who owes you a debt. The information made available as a result of a skip tracing may also be necessary in the event that you need to launch legal proceedings to recover your debt, and to do that it might be necessary to conduct a skip trace to find an address where you can effect service.

To successfully conduct a skip trace, some of the methods used might include:

  1. Public records
  2. Background check
  3. Criminal records
  4. Credit report
  5. Utility records
  6. Employment records

However, in the event the construction company has become insolvent, subcontractors often find it very challenging to recover their unpaid invoices, as there can be a great number of individuals before them who have a higher preference in terms of being repaid.

This will largely depend on whether or not the insolvent company appoints administrators to take care of the debts they owe, and pay back creditors, and then, how the administrators pay back the creditors.

Often times unsecured creditors (such as is usually the case for subcontractors) are not high in the preference list. Further, there are times where the preferences of repayment was not accurately formed, and so disputes arise as to who should in fact be paid first.

Generally, creditors can check if the debtor company is under external administration by checking the ASIC website.

Debt collection can become even more complicated when a company is insolvent, yet do not enter administration, but just stop trading all together.

When an insolvent company does this, generally while they still owe debts, they have not entered formally any process whereby they are working towards repaying their debts.

While all attempts to recover debts should be done in line with the relevant laws, it is an important and useful tool for subcontractors who are looking to recover unpaid invoices, or debt collection agents acting on their behalf, to remind the debtor company that their credit rating can be jeopardised after prolonged periods of time in which they do not repay their debts.

Avoid Construction Industry Debt Collection with Subcontractors’ Charges

In Queensland, subcontractors have the option of using a subcontractors charge as a legal means of collecting payment for services rendered on a building project.

The subcontractor has a priority right to be paid for their labour before other creditors of the contractor or developer thanks to the charge that is put on the real estate or land that is the subject of the construction project.

This means that the subcontractor will be paid from the profits of the sale of the property or land before other creditors in the event that the contractor or developer files for bankruptcy or is unable to pay their debts.

Subcontractors may benefit greatly from having this degree of protection, especially when the contractor or developer has a precarious financial situation.

Subcontractors are further protected from not being paid for their work on the project by subcontractors charge, which makes sure that their payment is independent of the developer's receipt of funds from the prime contractor.

It is important for subcontractors in the construction industry to remain mindful of the fact that they must try to recover their unpaid invoices prior to a construction company becoming insolvent.

For those subcontractors who may need assistance in recovering their debt from construction companies, such as negotiating payment plans, applying to have a credit file put in default, or any other measures that may need to be explored as it relates to your individual circumstances, than Advance Debt Collection can assist.

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