Ensuring a healthy cash flow is often a merry dance, but sensible financial management can improve the process for both sides – and avoid the need for fancy legal footwork
Most of my work in the construction industry is concerned with dealing with cash flow issues –reviewing contracts and subcontracts, with particular reference to amendments that may have been made to the payment mechanisms. I seek to negotiate out what I foresee to be problematic clauses.
In my opinion, there is no need for employers to amend the Joint Contracts Tribunal (JCT) Forms of Contract as the payment mechanisms have been worked out and represent the best that can be achieved to satisfy the different interests that prevail in the industry.
I really take exception to public sector employers, in particular, amending the standard provisions to introduce more onerous conditions – it is unnecessary and should be discouraged.
This also means that contractors will have to pass corresponding amendments down the supply chain and the whole industry gets affected by protracted and prolonged payment periods. I have recently been involved in a process along with SEC Group Scotland where we made the strongest representation to the Scottish Futures Trust about discouraging the public sector to amend standard forms, and the whole industry needs to support initiatives like this to ensure prompt payment.
I spend a lot of my time with organisations who are suffering from cash flow difficulties and who are having payments held up across the supply chain, and I am often asked what is the most favourable strategy to adopt under such circumstances to endeavour to release cash that is held up.
There is no doubt that negotiating your way out of difficulty is the best answer but it takes two to tango – and often the other party involved simply digs their heels in and refuses to pay either for measured work, variations and loss and expense claims.
So what do you do when you are faced with these circumstances?
The first thing I look at is the payment provisions and then the dispute resolution provisions in the contract. Quite often there are provisions in the latter which can be extremely onerous. For example, if the matter in dispute is referred to adjudication by the subcontractor, then the subcontract conditions might say that the subcontractor will be wholly responsible for the fees of the adjudicator and also for the costs of the other party. Many in the industry consider this latter provision is unlawful and the result is that running off to adjudication is not as easy as it sounds.
I am also sorry to say this, but adjudication is often not the right answer. Even if you have an adjudicator’s decision in your favour, it certainly does not mean that payment will immediately follow. All sorts of tricks can be brought out of the woodwork to prevent payment, including challenging the jurisdiction of the adjudicator, contesting the conduct of the adjudicator, and alleging breaches of natural justice. This results in the successful party having to raise a court action to deal with the enforcement of the adjudicator’s decision, which can be a further expensive and lengthy process. Having said that, my view is that the courts have made it absolutely clear that they will be very reluctant not to enforce an adjudicator’s decision. But that does not mean that someone might not have a jolly good try to put it to the test, and the result is that the winning party faces significant expenditure defending the enforcement action.
There are two other important issues I would like to touch on in relation to cash flow. Firstly, it is absolutely essential that when a contractor or a subcontractor submits applications for payment, that they do so in accordance with the requirements of the payment mechanism in the contract. I encourage my clients to agree a payment schedule that shows when the application for payment has to be made, when the due date is, when the final date for payment is, and when a pay less notice has to be issued. It is absolutely vital that you comply with these provisions so that there can be no interference with your application for payment.
Let me give some examples of some recent experiences. A subcontractor was required to put in an application for payment by no later than 2pm on the 30th day of each month, but failed to meet this timing requirement and submitted it at 4pm. The main contractor rejected the application and the subcontractor had to wait another month before he could submit his next application, suffering serious cash flow problems as a result.
Another area where I often encounter problems is in relation to the information that contractors and subcontractors submit with an application for payment. In my experience, it is absolutely critical that you provide as much detailed information as is required, with all the backup necessary. This helps to prevent the usual exchange of communications with allegations that the information is not satisfactory or detailed enough, or that claims are not properly vouched and supported. All of this usually results in only a payment to account being made instead of the contractor or subcontractor being paid the full value of their application. The remedy often lies in the contractor or subcontractors’ own hands to ensure that they present the relevant level of information that will allow the application to be fully analysed and to stand up to scrutiny.
In conclusion, I recognise that the UK construction industry is continually having to adapt and accept the challenges of new initiatives. Some recent examples of this are health and safety issues and the introduction of building information modelling (BIM). All of us in the industry, regardless of age or sector, continually have to go through a learning curve to take our businesses forward and be up-to-date with the continual process of change.
I am a great believer in the fact that many contracting and subcontracting organisations need to be more alert to the commercial management of their own businesses, because proper cash flow is the absolute lifeblood of their business.
As an adjudicator, I see many instances of unfairness. But the remedy often lies in the hands of the organisations involved to ensure that some of the suggestions set out above become part and parcel of their day-to-day management.
A CAMPAIGNER FOR FAIR PLAY
Len Bunton (pictured left) is the former chairman of the Scottish Building Contracts Committee and the Scottish branch of the Chartered Institute of Arbitrators. He also chairs the Construction Scotland Innovation Centre Project Delivery Group. He has been a campaigner