Whether you’re working directly for the client or via a recruitment agent, late payments are an unacceptable – and all too common – occurrence for IT contractors.
Although company insolvencies decreased in April and May of 2024, they jumped back up in June, meaning that the number of company insolvencies remains much higher than it was in the 5 years before the Covid-19 pandemic.
So if you’re working as a PSC IT contractor, the bottom line is you need to take late payments extremely seriously and put processes in place to stop them from happening.
In this article, Nicholas Hopkins, Director and Head of Contract at VIQU, sets out the advice he has given to many IT contractors over the years, plus tips that you can learn from how VIQU limits late payment issues as a business too.
Don’t let aged debt turn into bad debt
First, let’s make clear the difference between aged and bad debt. For PSC contractors, ‘aged debt’ occurs when they are owed money either by their recruitment agency or their client.
In contrast, ‘bad debt’ is normally parallel to ‘aged debt’, but those debts are not seen as retrievable.
So IT contractors who allow clients or recruitment agencies to owe them money must do so with the knowledge that it could turn into irretrievable bad debt.
Learn from the mistakes of others
There isn’t a week that goes by when I don’t hear some sort of disaster that a contractor’s experienced either as a result of a business or recruitment agency going bust, or just poor and really difficult processes from some clients to get an invoice paid.
And on the very odd occasion, this has led to terrible situations where contractors have lost their homes and even their spouses due to them allowing bad debt to build up over time, and then turn into aged debt.
Just because you might be in the position to allow aged debt to build up a little, it doesn’t mean you should. For example, just two weeks ago I spoke with an infrastructure engineer contractor who had gone through a situation where the contractor’s client was waiting to get paid by their customer, and unfortunately, the client folded and the contractor ended up with 3 months of unpaid invoices.
So heed my advice and carefully consider my advice…
Read every line of the contract
You should be reviewing each contract in detail as standard – although you’d be surprised by the number of contractors who have admitted to me they just ‘skim’ read.
There are two main aspects of a contract to consider extremely carefully when it comes to avoiding debt.
Payment terms
Contractors working via recruitment agencies or directly with a business should expect payment terms ranging from 21 to 28 days.
If your next contract contains terms that are higher than 28 days, you must push back and explain that you cannot sign a contract with payment terms higher than 28 days. Remember, the lower the payment terms, the more likely you’ll be paid and not waste your time. Therefore, you’ll be mitigating the risk more effectively and creating better cashflow!
If you have any reason to doubt the client or recruitment agency is going to pay you, enforce strict 7 day payment terms or ask for payment upfront.
‘Paid when paid’
A ‘paid when paid’ clause essentially means that you (the contractor) will not get paid until the recruitment agency does by their client. You cannot accept this level of risk under any circumstances, so read the contract properly and ensure there is no such clause included.
Due diligence is key
You should perform a credit check and do research on Companies House for every client and recruitment agency you consider working with.
But I’d also strongly advise taking it a step further and looking into the directors of the company. By doing this you can work out whether they’ve declared a business insolvent before. If they have, you should avoid them at all costs.
You do not want to fall victim to a ‘phoenix company’. By this, I mean that there have been cases where directors will close a business, and then open a replica the very next day with a different name – ‘rising from the ashes’. Doing this means their debts are wiped – including what’s owed to you – meaning you’re left with dreaded bad debt!
If you have any worries over the directorship of a business you’re considering working for, you can ask for a personal guarantee against directors of the business or for payment upfront. If they get twitchy at your request, that’s a clear indication of where this is headed… to bad debt.
Remember, big names don’t guarantee payment
There are plenty of high-profile businesses that have gone into administration in the last 2 years. Working for a big business does not protect you from bad debt!
In fact, it’s often larger companies and organisations which contractors struggle to get paid by because they have so many departments and processes which often don’t speak to each other properly.
So although a household name can look great for your CV, do your due diligence before you engage with them.
Know how the processes work
Firstly, you want to make sure there is an efficient timesheet approval process in place. You don’t want to be left waiting to get paid because only one person can approve your timesheet and they’ve gone off on their holiday!
Secondly, I think it’s really important to understand how your client’s invoice process works in order to avoid being paid late. You should check in with the recruitment agency or the business’s finance/accounting department to understand what your invoice needs to contain, whether a PO number is required and any deadlines involved.
I’ve known finance and accounting departments to not pay contractors because of tiny spelling errors or the invoice not being in their preferred format… So make sure you’re 100% clear on what you need to do to get your invoice approved and paid on time.
It’s too late. I’m trying to recover aged debt. What do I do?
If we assume that it’s too late to follow the steps I outlined above, as you’re already trying to recover the debt, I would recommend the following:
1. Escalate the issue
The aim is to fix the problem and get paid, whilst keeping things friendly.
If you’re working directly with a client, you should start with your line manager. Ask them if they know why your payments are delayed. If they don’t know, I’d suggest finding a point of contact in the finance/accounts department of the company and trying to understand why they are not paying you on time. You should only escalate it further up the chain of command to a director of the company if you’re still not getting anywhere.
If you’re working via a recruitment agency, the first thing you should remember is to avoid slagging off the agency or being rude to them. It won’t do you any good in the long term.
If everything you’ve tried has failed, reaching out to the client you’re working with should be your last course of action. There might be clauses in your contract stating you cannot go past the agent to the client. However, if they’ve broken the contract by not abiding by the payment terms, then you should highly consider doing it.
Depending on the situation, there might be the opportunity to escalate it or at least elude to it via a Third Party Debt Order.
2. Pre-action protocol
It’s important to understand how pre-action protocol for debt claims work. Start with issuing a Final Demand, followed by a Letter Before Action to the business that owes you the money, mentioning your intention to take this further. People do not want to go to court – so the vast majority of the time this will work.
If you’re unsure of pre-action protocol, or your letter doesn’t work, I’d recommend speaking with a solicitor to understand the options available to you.
3. Be prepared to stop working
There might be incidences where you’re happy to extend the payment terms slightly, but you must stay aware of the debt owed to you and be willing to put a line in the sand and stop working.
It’s important to not allow emotion to become involved in this decision. If you’re not being paid for your services, stop!
4. Be black and white
My main piece of advice for contractors at this stage of the process is to not allow emotions to overtake them. I’ve heard stories where contractors have decided to cause some pain to their clients before walking away (locking companies out of systems, shutting down servers etc.). On some occasions, this has led to threats of claims against them for losses. The excuse of being owed money won’t hold up in court. So think before you act.
To conclude, with Labour recently announcing plans to introduce new legislation that will aim to eradicate late payment of invoices to small businesses, you might shrug your shoulders and reassure yourself that the law is on your side and that ‘Jeff’ said he’d pay you…
But the reality is, if you do not heed at least some of my advice, you will end up with bad debt at some point in your contracting career.
In 10 years of trading, VIQU has never experienced a case of bad debt. So if you take nothing else away from this article, live by these three golden rules:
- Carefully consider the clients you work with
- Have solutions in place to mitigate risk
- Have solid credit control and payment collection processes in place
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