Bad debt is money owed that will not be collected. By the time it is recognised, the work has been done and the cost incurred, and only recovery remains.
Almost everything effective happens earlier.
Extending credit is a decision
Invoicing on terms is lending money. It is frequently done without any decision having been made, because it is simply how the business has always worked.
For commercial customers of any size, a credit check and trade references before the first job cost little. For repeat customers, the record is already there: whoever paid slowly last time will pay slowly again.
Deposits
A deposit removes the risk in proportion to its size and filters out the customers least likely to pay, who are the least willing to pay anything up front. See deposits and progress payments.
Stop when payment stops
The most expensive pattern is continuing to work for a customer whose earlier invoices are unpaid. The exposure grows on a customer already demonstrating they will not settle.
Stopping is uncomfortable and it is the single most effective control available.
Preserve the rights that exist
For work on property, lien rights are the strongest remedy a contractor has, and they expire on short statutory deadlines. Preserving them is done at the start of the job, not at the point of dispute.
Chase early
Recovery rates fall sharply with age. An invoice a month overdue is usually collectable; one at six months frequently is not — see collections and accounts receivable aging.
Writing it off
At the point recovery is not realistic, the amount is written off. That records reality; it does not create a loss, which happened when the work was done unpaid.