As the construction industry contracts and the margins become tighter, business ultimately becomes more risky. There are some key measures that contractors can implement to protect their business and cash flow from the risk of non-payment under a contract.
SECURING WORK FROM SECURED CLIENTS
At the outset of a contract, a Contractor needs to satisfy himself that he is securing work from a secured client. The Contractor needs to ensure that his contracting counterparty has the financial capability to discharge the contract sum as and when the works are carried out and monies become due and owing.
While the concept is not new to the industry, it is now more imperative than ever for a contractor to carry out the necessary due diligence on the potential client. The most traditional method that contractors have used in order to secure payment is to seek a parent company guarantee from the client. The problem is that, in the past, contractors have not been sufficiently diligent to look behind the parent company guarantee as to the financial strength of the parent company. This diligence is now imperative in order that the Contractor can be satisfied that the guarantee will be valuable.
But this diligence must be maintained throughout the contract and afterward. The contractor should ensure that there are robust provisions included in the contract which entitle the contractor to review on an ongoing basis the financial stability of the client and its parent. This type of provision on the face may be abhorrent to a client as they may be reluctant to share with the contractor their on-going financial information. However, it is going to be the reality of the new construction environment. It will be tough for contractors to bring in new business but if you bring in bad business there is a strong possibility that you will put yourself out of business.
In addition to a parent company guarantee contractors should also seek some form of bank certificate, similar to the one provided for under clause 35(a) of the current RIAI Standard Form. Rarely, however, does the contractor manage to obtain either of the forms of security which are intended by clause 35(a). Contractors are going to have to insist that these provisions are complied with at the outset of the contract. Significantly, under clause 35(a)(ii) of the RIAI Contract there is no timeframe as to when the employer must provide a certificate from his bank confirming that he has sufficient funds available to him to meet the cash flow of the development and guarantee payment of any architects’ certificates which remain unpaid. The obligation can be enforced by the contractor at any time during (or even after) the contract.
GETTING PAID DURING THE COURSE OF THE CONTRACT
Getting paid during the course of the contract is the lifeblood of the contractor’s business. In order to make sure of getting paid on time it is absolutely imperative that contractors are fully aware of the payment provisions of their contract and as to when they become entitled to payment, on foot of a certificate, or whether they have an entitlement to have a certificate issued, it is critical that they understand the timing of these key events. What is also critical is to make sure that when they don’t get paid they know precisely what action to take.
This entitlement in relation to seeking payment is also particularly relevant when it comes to seeking payment for variations and loss and expense from delay and disruption during the course of the contract. Contractors must maintain detailed records on an ongoing basis to support and substantiate variation and delay claims during the course of the contract, so as to be in a position to make on-going applications for payment of same and thereby protect their cash flow. Leaving large claims for loss and expense or variations until the end of the contract, to be dealt with at the final account stage, is a real risk in this current market because at the end of that final account stage, if you haven’t sought security from your client upfront then there may be a real risk of not getting paid for legitimate claims at the end of the contract.
The necessity to maintain up to date paperwork is particularly relevant for s engaged in public works contracts, as under the new GCCC contracts the timing of notices in respect of claims for additional monies or claims for additional time is absolutely critical to the success of the claim.
But it is not just about making sure that you serve your first notice within the time frame set out in the GCCC contracts, specifying the provision of the GCCC contract that you are serving your notice under, the nature of the claim and the nature of the delay.
The critical notice is the later notice which has to be served, either under clause 9.3 and/or 10.3, within effectively 40 working days after the Contractor becomes aware of the delay or compensation event, or should have become aware of something that could result in an entitlement. This notice must set out the full detail of the nature of the claim, the relevant facts about the claim, the cost impact of the delay event on the contract sum and also the time impact of the delay on the programme. This requires s to adopt a new approach to their contracts when working with the public sector, insofar as Contractors will not only need to meticulously maintain the necessary records during the course of the Contract but will also need to become far more familiar with programming and the delay impact of events.
GETTING PAID AT THE END OF THE CONTRACT
Getting paid at the end of the contract is generally the most problematic part of getting paid. The key issue at the end of the contract is to get paid in full the amount owed, and in the shortest timeframe possible.
One of the biggest problems contractors face after the PC certificate has issued is that the final account process can extend way beyond the 12-month defect liability period and consequently the Contractor finds itself in a prolonged exercise. Contractors should be focussed on moving the final account process on as quickly as possible, so as to either get paid or alternatively have a dispute crystallised so that the dispute resolution mechanisms under the contract can be invoked. In order to aid the final account process, the contractor must ensure they have been keeping up to date records and that they are able to substantiate their claim.
If Contractors take the time to implement the measures outlined above then they will be minimising the risks of non-payment under the contract.
During the course of the contract, all paperwork and records should be kept up to date, and attention needs to be given to ensuring the correct records are being produced to definitively substantiate variations, day works, any disruption, or delay effects and costs. Contractors need to be absolutely meticulous about serving notices on time and correctly. Good programming advice is essential, and this goes hand in hand with keeping the payment and works programme up to date, recognising and recording delay events as they occur and notifying those delay events to the client.
If contractors fail to observe these basic rules and enter into contracts when they have not done everything in their power to make sure they are securing payment for their company, they will be doing themselves a disservice and putting their business at risk in an economic environment where such a risk could put them out of business.
This article was first published in Construction and Property News