Don't let a balance build while you keep working
Set a limit on the unpaid money you will carry before the job starts, and act the week you reach it. Two unpaid months is a conversation. Four is a serious exposure you are funding from your own bank account.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
Why it matters
Each unpaid month feels like a blip while the work is going well and the site wants more labour. So the exposure grows a month at a time, and each decision to keep going is easier than the last. By the fourth unpaid month you are your main contractor's largest unsecured creditor, and your bargaining power has gone with your cash. A limit set in a calm month makes the decision for you in a pressured one.
How to do it
- Decide before the job starts the largest unpaid balance and the longest overdue period you will carry on this contract, and write both down.
- Put the limits on the tracker, so the current exposure shows against them every week.
- Agree in advance what happens at the limit: a director's call to your main contractor, a formal letter, a review of the right to suspend.
- Take that action the same week the limit is reached, whatever the site relationship.
- Review the limit each month against what the contract now owes you.
Example
Illustrative example. The scenario and figures are invented.
The facts
A subcontractor sets a limit of two unpaid months or £80,000 overdue on a £500,000 contract. Months four and five, £70,000 together, are certified but unpaid. The main contractor asks for extra labour to speed up. Month six is then certified at £35,000 and not paid by its final date for payment.
What happens
- On the Monday after month six's final date, the tracker shows three months unpaid and £105,000 overdue against the £80,000 limit.
- The director phones the main contractor's commercial director that day, and follows up with a letter setting out the three overdue sums.
- The letter says no extra labour will be provided until the balance is paid, and that the paperwork is being reviewed.
- The main contractor pays months four and five, £70,000, within the week, and month six the week after.
Certified sums overdue on the review day
| Month | Overdue |
|---|---|
| Month four | £40,000 |
| Month five | £30,000 |
| Month six | £35,000 |
| Total | £105,000 |
The outcome
The balance falls from £105,000 to nil within a fortnight. Without the limit, the extra labour would have gone in and the balance would have passed £150,000, taking the subcontractor's leverage with it.
The limit was set when nobody was asking for anything, which is the only time it can be set honestly.
To have this set up for you, see our Late Payment Prevention service.