Bad debts and how to avoid them

Customers failing to pay invoices is a common problem for almost all electrical contractors.

Along with the adverse effect on cash flow, the time and mental energy spent on chasing payment means a bad debt costs you more than the debt itself.

Electrical contractors need to have solid debt avoidance and recovery plans in place. This is particularly important for businesses which do not have the benefit of Project Bank Accounts (PBA’s).

That said, the implementation of stage 2 of the Project Bank Accounts system in Queensland under the Building Industry Fairness (Security of Payment) Act, so that PBA’s will apply to the bulk of major commercial construction jobs, is likely to provide significant benefit to electrical contracting companies trading in that State.

At a national level, the Federal Government has commissioned and now received a review of Security of Payment laws as they apply throughout Australia. It has significant recommendations as to how to improve security of payment legislation across the various jurisdictions and enhance the protection of all in construction industry businesses across the country.

The next update from the Building Ministers’ Forum with respect to the national Review of Security of Payment Laws:  Building Trust and Harmony (the Review), is expected to take on board the various comments from industry bodies like MEA and their advisers, including McKays. It is to be released by the Commonwealth shortly.

After decades of seeing contractors going broke after builders or principals fail, MEA and McKays hope it will not take decades to implement.

In the meantime, as an example of what is happening to electrical contractors around the country, here is the following case study. We have replaced the name of the actual client for obvious reasons.

 An electrical contracting business employing 14 people was looking to make the leap to larger contracting work.  They had a couple of experienced electrical workers teamed up with one apprentice each carrying out smaller jobs and the business owner was still on the tools on larger projects.

Payments on 3 of the larger contracts fell behind. The owner decided to keep working on the jobs because of his ambitions to move the company up to the next level.

The inexperience of the owner with proper contract administration, extensions of time, variations and meeting the relevant timeframes for notices under the contract, meant that things started to go pear shaped given the lack of cash flow on the major jobs.

Fortunately, before things got completely out of hand, the managing director contacted McKays via the MEA website and utilised the free letter of demand service available to all MEA members.  The business owner completed a brief debt recovery form onlineMcKays issued letters of demand to three of the bigger bad debtors. Two paid up within days and McKays then went on help with a successful adjudication application on the largest of the projects thereby getting the cash flow under control.

With the help of McKays, the business has implemented appropriate systems and procedures for entering into contracts, contract administration and recovery of outstanding claims. For McKays, it means we keep a good client from going broke and for the electrical contractor, it means they can sleep at night knowing they are much more likely to be paid when they should be and more likely to become the bigger contractor they want to be.

If you have problems with late or unpaid debts, take advantage of McKays free debt recovery service available to all MEA members for debts over $500.  McKays also offer a range of other legal services for MEA members. Contact the team at McKays or call Ian Heathwood, Industry Services Team Leader, directly on (07) 3223 5942 or 0418 199 416 for common sense, practical, legal advice from experienced lawyers who understand the contracting industry.