In the Scottish construction industry, cash flow isn’t just a measure of success – it’s a matter of survival. Avoiding taking action on unpaid or late invoices could cost your company time, relationships, and, most importantly, money.

The construction industry is unique where invoices often have a 30–90-day payment period rather than being payable on demand.

The Small Business Commissioner has recently been given sweeping new powers to investigate poor payment practices.

This includes the ability to impose multi-million-pound fines on businesses that fail to pay smaller suppliers within 60 days.  Interest and late payment compensation may also apply.

As construction relies on ‘pay when paid’ arrangements, these reforms may create real pressure points across supply chains.  Businesses will need to rethink how they manage upstream and downstream payments to avoid being caught in a liquidity squeeze.

These regulatory changes come at a time when costs are already at record highs. The BCIS Construction Cost Index has recorded costs rising by as much as 35% since 2020 and key materials, such as steel, have risen by up to 80% above the UK Consumer Price Index.

This combination of rising costs and delayed payments places huge strain on working capital. One of the most effective ways to mitigate that risk is to take proactive steps to recover debts before they become irrecoverable.

Swift action following unsuccessful informal attempts to recover debt is vital to improve financial stability and avoid potentially fatal consequences.

Why this matters for your business

One in five insolvencies in the construction industry can be directly linked to the late payment of invoices, making prompt payment imperative for healthy liquidity.

Regardless of the size of an organisation, the lasting impact of unpaid invoices on the health of company finances can be significant, and failing to act can quickly escalate the issue.

As in all industries, relationships between organisations are important to preserve; however, there are circumstances where legal action is the only available route to resolution if informal warnings have not been effective.

Practical steps to recover unpaid debts

In Scotland, there is no mandatory pre-action protocol that a creditor must follow before raising a court action. However, it is important to check the terms of any contract in place, as some construction agreements require a formal demand notice to be issued to the other party before litigation can be commenced.

Certain contracts may contain mandatory mediation or arbitration clauses, which would require the parties to attempt alternative dispute resolution before proceeding to court.

These clauses should be reviewed carefully at the outset, as failure to comply with them could provide the debtor with a potential defence to any court proceedings.

Although not always required, issuing a formal demand letter to a debtor is a low-cost and often effective first step prior to any court proceedings.

A letter from a solicitor’s firm can carry significant weight - and in many cases - is sufficient to prompt the debtor to engage in dialogue and reach a suitable arrangement without the need for court proceedings.

Where a demand has been sent and payment is not forthcoming, a decision will need to be made as to whether to raise court proceedings or, where the debtor is a company, whether to proceed by way of a statutory demand.

At this stage, it is important to be clear on the outcome you are seeking. If you have provided certain goods, vehicles or machinery to a party, and payment has not been forthcoming, you can seek a court order for the return of these assets to you.

You may alternatively seek an order for specific implement, which would require a party to fulfil a positive obligation under a contract.

If you are simply seeking payment for an outstanding invoice, you can ask the court to order that these sums be paid to you. You are also entitled to seek interest at the judicial rate of 8% on the debt, alongside the expenses of the court action.

Where it is a commercial contract for goods or services, you can also seek late payment compensation and late payment interest on the outstanding sums.

Choosing the right court route

Court proceedings for debt recovery are brought in the sheriff court, with the appropriate procedure depending upon the value of the claim.

Simple procedure can be an efficient and cost-effective method of resolving disputes where the claim value is £5,000 or less.

For claims exceeding that threshold, the appropriate procedure is ordinary cause, which is subject to a more formal set of procedural rules. Claims of higher value or those involving greater complexity may be raised in the Court of Session.

Enforcing payment

Once a decree has been obtained, and payment is not forthcoming, a creditor can proceed with enforcement action.

This follows formal notice requiring payment within a defined period, after which measures such as arrestment - freezing funds held by third parties, such as bank accounts, attachment of assets, or inhibition over property can be deployed.

Statutory demand and insolvency proceedings

Where the debtor is a company, an alternative route is the service of a statutory demand. A creditor may serve a statutory demand on a company requiring payment of a debt within 21 days of service, after which the creditor may present a petition for the winding up of the company if the debt remains unpaid.

This can be a powerful tool where the debtor is unable to pay its debts, but it should be used carefully and only where the debt is unlikely to be disputed.

Conclusion

Early decisive action is critical. The longer a debt remains unpaid, the harder it becomes to recover - and the greater the risk to your business. 

The options available to creditors are broad and can offer an effective remedy to those who engage strategically.