Planning & Construction News

How to tackle payment problems in construction

January 30, 2023

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Jonathan Nugent, managing director of Arbicon, the leading firm of construction claims consultants, highlights the source of payment problems in construction in this current tough economy and how to tackle them

The construction industry has seen in recent times massive cost inflation coupled with
increasing taxes and more detrimental rules. What is forgotten is for any business to survive it needs to be paid, cash flow, to cope with all the economic pressures. Failure to get paid can lead to bankruptcy and if the firm paying goes bankrupt, which is now rife, that can be fatal to the payee.

What mistakes do contractors make that lead to payment problems and what can be done?

Non-payment can be as a result of contractors leaving themselves open to claim or cynical profiteering by the paying party. The solution is engaging in an effective contract and deploying an effective dispute resolution process arising from that contract. Lack of attention and understanding of the contract is nearly always the source of all problems and mistakes made.

What is an effective contract and how can it be deployed?

The first point to make is who are you in contract with? A more common mistake than you might think! Ensure the full details and credit rating of the other party have been clearly identified. The remaining points are to tackle them get all the conditions and terms right not just payment terms. Where terms are missing or imposed without review by you, you are heading for big trouble.

Deployment of your own set of terms at the quote/tender stage is the best solution. If the paying party does not counter them by the time you start work, they will be the contract terms. If you sign a contract subsequent to the start, that new signed contract will wipe out your terms and will be the contract.

Why would you sign anything after your start with your terms in place? Know your power here. Any order or contract issued after the start is not worth the paper it is written on unless you accept it.

Normally before the start, there is a prestart meeting or subcontract order that will aim to wipe out your terms so consider this carefully, negotiate properly and avoid onerous terms that the paying party want to impose.

Pay attention to all terms, price, time and scope are essential, look at the detail. Also, what payment terms are there? Is the price fixed or remeasured quantities? Is there a price increase clause? Is there any design responsibility? Is there a legally compliant specification and design? Is there aprogramme incorporated? Is there an EOT, loss/expense and Liquidated Damages provision? Is there a definition of practical completion? What retention is there and when is this be repaid? What is going to be delivered? What preliminaries are expected? What qualifications need to be incorporated? Are there any warranties and insurances required? What provisional sums are there and how are these dealt with? Suspension and termination rights? How are variations dealt with? What can be recovered in respect of late payment and debt recovery costs? (If Late Payment Act applies or not?). What notices must be served and how? Are there assignment rights (passing the contract to a valueless firm that cannot pay)? What adjudication provisions are there? The list goes on.

As noted above, look out for amended or onerous terms such as supplement the labour, where the paying party can unilaterally engage others at your expense or if the employer goes bust and does not pay, you are not entitled to any payment. These are legal clauses. Watch out too for instant termination and condition precedents, all of which need looking at and might be illegal, so take advice.

With an effective contract in place how can payment issues in construction be tackled?

Irrespective of contract content, you can adjudicate and force payment in any commercial contract.

The Construction Act dictates payment and adjudication rights use it. It makes certain clauses illegal and makes the parties engage in an “adequate” payment process. Any clauses that seek to take away the right to payment dependent on some process, for example, are void. The Construction Act does, however, allow the parties to be free agree how and when payments are made, so beware of onerous conditions on these points as they will not be illegal.

Payment applications and notices are required and the deployment of these properly is essential, they must be in time, state the sum due and the basis of the calculation of that sum. The sum due is called the “notified sum”. Mistakes are commonplace and Employers or contractors that do not understand the legal process here are likely to get into trouble. If notices are absent or void, the payee get what he asks for if it is asked for properly.

If a payment has been “notified” and not paid, you can suspend the works with a seven-day notice, all costs of demobilising, subsequent remobilising, delay losses and an extension of time will be due under statute, if your contract says otherwise it is void.

To pursue unpaid sums do not use court. Use adjudication, the process aims at a legally binding payment order in 28 days. If you are already in court, it does not matter. You need no permission; you can adjudicate at any time. It will normally end the court proceedings and the cost of such if common sense prevails. It is recommended that advice from a construction claims consultant such as Arbicon specialising in adjudication be taken as we understand the legal aspects of payment and all other issues, plus prosecuting in adjudication and essentially having construction expertise.

If you have effective late payment provisions in your contract, such as 8% above the base rate and debt recovery costs, you can add interest and Arbicon’s fees to the claim.

Arbicon is a construction contract and adjudication specialist. If you want your contract drafted properly and get paid, we can help. We had and almost a 100% track record last year in prosecuting construction claims in adjudication and our clients all got paid.

Jonathan Nugent