Cash-strapped customers who put off paying the tab are costing small construction businesses tens of thousands of dollars a year, new research reveals.
After almost a decade running a Melbourne residential building company alongside her husband, Monique Cotton has seen her fair share of clients try and wiggle their way out of coughing up for the final bill.
But as recent interest rate hikes hit wallets hard and the economy edges ever close to falling in the shitter, she says the cases of clients not paying up on time are on the rise and construction companies are paying the price.
“People think we make a lot of profit and charge ridiculous margins while acting as a middleman between contractors and clients, but this is not the case at all,” she told Build-it.
“Often, suppliers ask for upfront payments and contractors are paid as soon as the work is finished, usually with an upfront deposit and the balance once the job is completed.
“However, client payments often have terms of anywhere between 2 weeks to 30 days after work is completed.
“This situation leaves builders in limbo where they have to foot the bill upfront, creating a dangerous 30 to 60-day gap between payments that severely impacts cash flow.”
And these late payments don’t come cheap. According to the recent ‘Pursuing Payments’ report by bank payment company GoCardless, 27 per cent of Aussie businesses estimate losing up to $6,000 from late payments annually, and 11 per cent of businesses estimate losing $12,001 – $30,000.
But the company’s Australian general manager, Luke Fossett, warned that the impacts of late payments are felt way beyond the bottom line as the disruption to cashflow creates a “butterfly effect” that travels down the supply chain.
“Late payments are a big concern for businesses across all sectors and the construction industry is no exception. With 72% of Australian business owners identifying the task of chasing multiple late payments as a ‘payment nightmare’, so it’s clearly a massive problem,” he told Build-it.
“When one contractor in the chain misses a payment, it can cause escalating delays and cashflow issues for everyone else involved down the chain.”
Monique said the pressure has gotten so bad on small businesses that some would actually rather shut up shop than spam their clients to cough up the cash.
“They end up chasing clients for payments while being chased by suppliers and contractors at the same time,” she told Build-it.
“This is part of the reason why many SMEs within the construction industry have had to shut their doors. It is extremely difficult for small business owners to handle such a large upfront capital requirement.”
How can you chase up a customer?
With no end in sight to the current cost of living crisis, over half (55 per cent) of Aussie businesses also said they were concerned that late-paying customers will increase over the next 12 months.
But that doesn’t mean construction businesses are stuck spamming emails and endlessly calling up clients. Fossett said a lot of Aussie businesses have instead rethought their approach to invoicing and collecting payments after realising the old ways “might not cut it anymore”.
“One approach that businesses are trying is changing their fee structure,” he told Build-it.
“Instead of waiting for a big payment at the end, they’re shifting to a model that collects payments at regular intervals. This change helps create a more predictable cash flow.
“Not only does this reduce the risk of late payments, but it also lets businesses manage their resources better. With a steady income, they can invest more confidently in materials, labour, and other expenses.
“Of course, moving to regular payment collections comes with its own set of challenges. It takes time and resources to handle payment failures and keep accounts in order.
“However, updating your payment stack can help. For example, direct bank payments can streamline the collection process and cut down on administrative hassles, making it easier to switch to this new fee structure.”
According to the general manager, the most important step businesses could take was to set clear payment terms and ensure invoicing was done promptly and accurately from the start to avoid misunderstandings.
“Clear communication can make a big difference,” he told Build-it.
“Mistakes can delay payments, but timely and correct invoicing encourages customers to pay on time. Automated reminders can also be a game-changer, helping ensure deadlines aren’t missed and saving valuable time.”
Luke also encouraged companies to consider setting up a direct debit system, allowing businesses to collect payments directly from customer’s bank accounts on the due date.
As her building business moves forward, Monique said that construction companies can no longer afford to be reactive to late payments and encouraged others to follow in her footsteps to get ahead of the curve.
“We are 100 per cent proactive. We’ve worked hard to implement an automated payment reminder process and we make sure to cross our T’s and dot our I’s with every subcontractor agreement, building contract, and credit application with suppliers,” she told Build-it.
“We also send reminders before the payment is due, which is a softer, more friendly approach than chasing someone after their payment has become overdue.
“In the past, we’ve walked away from clients who were serial late or non-payers, though not every SME in the industry can afford to do this.”
