Avoiding Common Debt Recovery Mistakes: A Guide for Malaysian Contractors

Debt recovery is a critical issue for contractors in Malaysia's construction industry. Unpaid debts can disrupt cash flow, delay projects, and even threaten the survival of a business. While pursuing debt recovery is necessary, contractors often make mistakes that can weaken their case or delay the process. Here are some common mistakes contractors make when pursuing debt recovery in Malaysia and how to avoid them.

1. Failing to Use Strong Contracts

One of the most significant mistakes contractors make is relying on poorly drafted contracts or verbal agreements. Weak or vague contracts make it difficult to enforce payment terms and prove the scope of work in case of disputes.

How to Avoid This Mistake:

• Always use written contracts that clearly outline payment terms, project milestones, and dispute resolution mechanisms.

• Include clauses for late payment penalties, interest, and suspension of work in case of non-payment.

• Have a legal professional draft or review your contracts to ensure they are comprehensive and enforceable.
  

2. Delaying Action on Overdue Payments

Many contractors hesitate to take immediate action when payments are overdue, hoping the client will eventually pay. This delay can reduce the chances of recovering the debt and may give the impression that you are not serious about enforcing payment terms.

How to Avoid This Mistake:

• Establish a clear payment follow-up process and act as soon as a payment is overdue.

• Send reminders and notices promptly, escalating to formal letters of demand if necessary.

• Avoid extending credit terms unnecessarily unless the client’s financial position justifies it.
  

3. Ignoring the Construction Industry Payment and Adjudication Act (CIPAA)

Some contractors are unaware of or reluctant to use the Construction Industry Payment and Adjudication Act 2012 (CIPAA) for recovering unpaid debts. CIPAA provides a fast and cost-effective method to resolve payment disputes through adjudication.

How to Avoid This Mistake:

• Familiarize yourself with CIPAA and its application in construction disputes.

• Use CIPAA to recover payments, including outstanding amounts, late payment interest, and associated costs.

• Seek legal advice to ensure compliance with CIPAA procedures and timelines.
  

4. Failing to Maintain Proper Documentation

Incomplete or disorganized documentation can weaken your case when pursuing debt recovery. Without adequate records, it becomes difficult to prove the scope of work, agreed payment terms, and completed deliverables.

How to Avoid This Mistake:

• Keep detailed records of contracts, invoices, progress reports, and correspondence with clients.

• Document project milestones, approvals, and any changes to the scope of work.

• Use technology, such as project management software, to organize and store records systematically.
  

5. Not Vetting Clients Properly

Taking on clients without assessing their creditworthiness or financial stability can increase the risk of non-payment. Many contractors focus solely on securing projects without considering the client’s ability to pay.

How to Avoid This Mistake:

• Conduct background checks on potential clients, including their payment history and reputation in the industry.

• Request financial statements or references from previous contractors.

• Avoid over-reliance on a single client to diversify payment risks.
  

6. Accepting Verbal Promises

Relying on verbal assurances from clients about payment timelines or additional work often leads to misunderstandings and disputes. Verbal promises are challenging to enforce in court or adjudication proceedings.

How to Avoid This Mistake:

• Insist on written agreements or confirmations for all payment arrangements and changes to the project scope.

• Document every communication with the client, including meeting minutes and follow-up emails.

• Avoid commencing additional work until written approval is obtained.
  

7. Overlooking Interest and Penalty Clauses

Many contractors fail to include or enforce interest and penalty clauses for late payments, losing leverage to encourage timely payments.

How to Avoid This Mistake:

• Include interest and penalty clauses in your contracts to deter late payments (18% per annum is a reasonable percentage).

• Clearly specify the applicable interest rate and penalties in your invoices.

• Enforce these clauses consistently to send a message that late payments will not be tolerated.
  

8. Not Seeking Professional Advice

Contractors often try to handle debt recovery on their own, which can lead to errors and missed opportunities for resolution. Lack of legal or financial expertise may result in weaker outcomes.

How to Avoid This Mistake:

• Engage a legal professional specializing in construction law to guide you through debt recovery.

• Consult a mediator or adjudicator to explore alternative resolution methods.

• Work with accountants or financial advisors to assess the impact of unpaid debts on your business.
  

9. Failing to Protect Cash Flow

While pursuing debt recovery, many contractors neglect their ongoing cash flow needs, which can lead to operational disruptions and additional financial stress.

How to Avoid This Mistake:

• Implement strict credit control measures, such as upfront deposits or milestone payments.

• Diversify your client base to reduce dependency on any single payer.

• Consider invoice financing or factoring to maintain cash flow while waiting for payments.
  

Conclusion

Recovering unpaid debts in Malaysia’s construction industry can be challenging, but avoiding these common mistakes can significantly improve your chances of success. By using strong contracts, maintaining proper documentation, and leveraging tools like CIPAA, contractors can navigate payment disputes more effectively. Seeking professional advice and taking proactive measures to protect cash flow will also ensure your business remains resilient despite payment challenges.

Remember, a well-prepared contractor is better positioned to recover what is owed and minimize financial risks. Stay vigilant, act promptly, and don’t hesitate to seek expert assistance when dealing with debt recovery. AUTHOR PROFILE

Rudi Cheu is the principal of Rule & Co. Advocates & Solicitors; a Malaysian law firm focusing on practical and cost-effective solutions for debt recovery and commercial disputes. With nearly a decade of debt recovery experience under his belt; Rudi is passionate about helping businesses navigate debt recovery challenges and shares insights at www.rulecolaw.com/blog.

He can be reached via Whatsapp: +60102028095 or via email: rudi.cheu.law@gmail.com