Know what each main contractor would owe you if it failed tomorrow
Your real risk is not the overdue invoice but everything a main contractor would owe you if it failed tomorrow, and that figure is usually far bigger. Work it out for every job each month, and set a ceiling for each main contractor.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
Why it matters
Most subcontractors measure risk by the overdue invoice, because that is the number the credit controller chases. When a main contractor fails, the loss is much bigger. It includes the application not yet due and the month of work not yet applied for. It includes the retention you were not going to see for a year, and the materials in the compound. As an unsecured creditor, with no security for the debt, you get back a small fraction of all of it. A monthly figure shows who you are really lending to, and how much, while you can still slow deliveries, apply early or stop.
How to do it
- For each live job, add up the unpaid applications, the work done since the last one, the retention held and the unpaid materials on site.
- Add the jobs together for each main contractor, because one failure takes every job with it.
- Set a ceiling for each main contractor, agreed in writing by a director.
- Update the figures every month. When one goes over its ceiling, write down what you will do: apply early, slow deliveries or prepare to suspend.
Example
Illustrative example. The scenario and figures are invented.
The facts
A brickwork subcontractor's credit controller is chasing a £38,000 invoice from a main contractor, and treats that as the risk on the job.
What happens
- The commercial manager adds the rest: £52,000 of work done since the last application, £31,000 of retention and £14,000 of bricks in the compound.
- The total is £135,000, against a ceiling of £90,000 that the director sets that week.
- Brick deliveries are cut to what the gang lays in a week, and the next application goes in on its due date.
The exposure in figures
| Head | Amount |
|---|---|
| Overdue invoice | £38,000 |
| Work since the last application | £52,000 |
| Retention held | £31,000 |
| Bricks on site | £14,000 |
| Total exposure | £135,000 |
The outcome
The main contractor enters administration 3 months later. The subcontractor's exposure is £78,000, not the £135,000 it had been carrying without knowing.
To have this set up for you, see our Insolvency Loss Prevention service.