The slow payment process is a problem that we have to deal with in the construction industry. As a contractor or subcontractor, you aim to complete the project within budget, on time and make profits. If payments delay, that is going to affect your cash flows and the ultimate success of the project. Therefore, the question of what happens when payments get slow is very relevant.
Payment is a contractual issue. It is the norm to have contracts signed between the contractor and the employer with terms that determine their relationship, specify the obligations of each and give guidance on how to approach matters regarding one party not performing their duties. Issues to do with payments are, therefore, covered under the contract.
Guidance by Written Contracts
It would be unfortunate for any person to accept to work on a project without a written contract. Verbal agreements are very hard for the courts of law to enforce. If issues arise, it will solely depend on the trustworthiness of the parties involved to handle the issues in a manner that serves the interests of all parties.
Where a signed contract exists, the events that will be triggered by slow payments will be possibly defined. With the popularity of standard forms of contracts for construction and engineering projects, it will suffice to look at their provisions with regards to this matter as they are commonly used.
Among the standard forms of contracts, FIDIC is the most widely used globally as it enjoys support from the World Development Bank. Also, the NEC Engineering and Construction Contracts published by the Institution of Civil Engineers (ICE) enjoys global recognition. The following arguments are based on these together with the provisions of some local standard contract forms and government construction industry policies.
• Doing Nothing (Nothing Happens)
As a contractor or a subcontractor, you can choose to do nothing. You notice that payments are slow and you do not take any action. You continue with the execution of the project normally.
However, this is a very risky move. You can only continue working if you have the money to pump into the project. It is not a worthy investment just to pump money into a project without getting the expected profits.
It is advisable to study the contract provisions carefully and take the necessary actions. Even when cash flow is not a problem for your business, taking action can help reinforce your bargaining power. Other parties will get the message that they cannot get away with their failure to honor their contractual obligations to you.
• Give Notice to the Employer/Client
If payments are slow, late or entirely deferred, most standard form contracts have provisions for the contractor to give notice to the employer of delayed payments. The contractor should have first made an application for payment to the employer through his contract administrator. Contractually, the period within which the employer is obligated to pay is calculated from the date of receipt of the contractor’s application for payment by the client.
• Possible Suspension of Works or Cancellation of the Contract
Construction and engineering projects require huge financial investments to get completed successfully. To cushion the contractor from cash flow problems, most construction contracts provide for the issuance of interim payments. When there is a delay in such payments, it means that the contractor will get into problems.
The FIDIC contract has provisions that allow for the suspension of construction works or possible cancellation of the contract if the employer fails to honor interim payment certificates. Specific clauses give such guidance. It is upon the contractor to identify such, make the appropriate business decisions and strictly follow the clauses for his pleases to be granted.
Although such provisions are there, it does not mean that the contractor should invoke them. It is more advisable to first identify the legal issues that might arise out of that. Equally, the effect such decisions will have on your business going forward is a worthy consideration. If you cancel the contract, you will have lost the job!
• Charge Interest on Late Payments or Offer Discounts to Prompt Payments
Late payments are subject to financial charges. This gives the contractor the right to charge interest on any delayed payments. The interest rate should be the prevailing rate charged by a regulatory bank in that country. This is like a punishment for paying late. It will prompt the employers to pay early. If they don’t pay early, the contractor receives compensation for the financial distress inflicted.
Also, you can encourage the employers to pay early by offering them an incentive. A discount for paying early will be the reward the employer is going to get. It means they will save a small percentage of the amount due. It can be met with a more positive response because of the reward it presents.
• Address Any Existing Disputes
Payments might have been delayed due to a dispute between the contractor and the employer. If there has been a disagreement as to the value of the work done on-site and the value certified by the employer’s contract administrator, the contractor should initiate a dispute resolution process.
It is advisable to start with a dialogue for the parties to negotiate the agreement. If that fails and the issues become more pronounced, it is allowed to use out-of-court dispute resolution mechanisms such as involving an arbitrator. In some other cases, the employer might be wrongfully withholding payments for their gains. Also, there could be a clear indication by the employer of not paying at all. If that happens, the contractors can seek a court order to enforce payments. However, court processes are lengthy and expensive. If the dispute is not that severe, it is advisable to seek alternative dispute resolution mechanisms to avoid plugging your business into high non-recoverable costs of litigation.
• Enforce Contractor’s Lien
This can happen where the project is complete and the employer wants to occupy it without honoring final payment requests from the contractor. The contractor has a right to retention of the project and can exercise it to compel the employer to pay. The contractor has an enforceable legal right to retain the possession of the construction site if the employer resists paying.
Several events get triggered when construction payments are too slow or delays are experienced in the payment process. Construction contracts recognize these and have provided express provisions for what should happen when payments get slow, delayed or are denied.
The course of action by the contractors is determined by the acuteness of the underlying matters. Just because the provisions are there it doesn’t mean they are always the right way to go. Each project is unique and careful considerations should be made before taking action.
I would recommend actions that encourage the parties to continue doing business. Therefore, take a closer examination of your business needs as a contractor and take action that won’t hurt your business. Also, maximize on actions that will cushion you from any financial distress and allow you to complete the project as agreed.