Why it pays to think ahead

 

SEC Group recently ran some seminars for contractors and subcontractors, more of which later in the autumn. We thought it was worth repeating the key messages in CABLEtalk to widen the knowledge of some of the commercial issues faced by our industry today. Great credit goes to SEC Group Chief Executive Rudi Klein and Alan Wilson of SELECT for their ongoing campaign to get rid of retention and improve payment and cash flow in the industry. It is a battle – and it will continue to be a battle – and SELECT members need to collectively support the initiatives that are under way. We start by saying that a lot of the industry problems are self-induced and contractors need to become much more commercially alert in relation to the way they operate the financial aspects of their business. So what are the issues you need to look out for?

 

  • Make sure you read contracts or sub-contracts you are about to enter into, and look out for amendments to standard forms, and in particular amendments to the payment provisions. You can then try to negotiate these out, or just walk away.
     

  • Look at the liquidated damages in the contract. If you’re a sub-contractor, are the liabilities of the contractor being passed down the line to you? You could have a sub-contract value of £100,000 and a liability of liquidated damages of £10,000 per week for late completion.
     

  • Beware of a termination provision that says something like: “The contractor can terminate the sub-contract at any time.”
     

  • Look at what the contract says about retention – retention might not be released until after completion of the main contract.
     

  • Contractor design portions [CDP] are the source of many problems. Discuss this with the design team and/or the contractor so there is a clear understanding of who does what, and who is liable for the interface. We hear the expression, “This is design development and is your responsibility” so often these days. Sort it out before you conclude the sub-contract. A thorough ‘responsibility matrix’ can help with this – outline clearly who does what.

 

Naturally, you want to be paid on time, but we see countless scenarios where payments are being reduced or made on an irregular basis. There is only one answer and that’s to have a payment schedule in your contract, which shows when you put in your application for payment, what the due date is, what the final date is, and when a pay less notice has to be issued. Assuming everyone sticks to the schedule, this brings certainty and you know when you’ll be paid, so you can then manage the same process down your supply chain. In our experience, this is one of the biggest failings in the industry and can be sorted by following what we suggest above.

 

What if I get money docked?

Another big issue is that you’ll get money docked off an application if you don’t submit fully detailed information with your application every month. That is one of the most common scenarios that adjudicators have to deal with. The solution? Provide all the information required – it’s as simple as that. Let’s give you a quick example. You assess that first fix electrical work is 70 per cent complete, but along comes the contractor who says no, it’s only 45 per cent complete. That element is obviously now reduced – so you need to prove your figure is correct with detailed information. If you have a bunch of unsigned dayworks, then you won’t get these paid, so make a pest of yourself and get them signed, and if not measure and value the works, so there can be no argument. Try to agree as much as you can during the course of the works, rather than have a growing gap in valuations which will likely be talked down at final account.

 

What if I don’t get paid?

Another issue we covered in the seminars was what to do if you don’t get paid. Our advice is as follows:

  • Arrange to meet whoever is not paying you and don’t negotiate by email

  • If you are being asked for more information, provide it

  • If all else fails, consider a dispute resolution route like adjudication.

You’ll need to consider this final option carefully. Before you issue a notice of adjudication, you’ll need to have all of your documentation ready first, so you need to spend time getting this right. However, quite often in our experience, the issue of a notice of adjudication will bring the non-payer to the table and you can get your cash flow moving again. The biggest issue with adjudication is that even if you get a favourable decision from the adjudicator, then the other party just might not pay you. The adjudicator’s decision might have given the other party a major financial problem if they don’t have the funds to pay you. So you are then left having to bear the costs of running the adjudication – i.e. your external consultant and/or lawyers’ fees. You might also be liable for the whole of the adjudicator’s fees and expenses. So before we advise clients to go down the adjudication route, we urge careful consideration.

 

What about cash flow?

The big question today is why does the construction industry in Scotland and the UK have continual problems about payment and cash flow, and what can be done about it? There are currently strong moves afoot to overhaul the whole procurement process, but that is obviously going to take time. The public sector needs to give greater consideration to value for money to get buildings properly designed and costed. Despite what is said, we believe that price is still king in the eyes of the public sector procurers, and as long as the public sector goes for the lowest – and often craziest – bidder then we won’t climb out of the mire. In the meantime, we urge you to join the SEC Group’s campaign to improve payment in the industry and to eliminate cash flow issues. You can read more about it in Rudi’s column on the following two pages.

 

In the next issue, Len will look at some of the many issues that SELECT Members have raised with him. If you wish to put any questions to Len, then please email them to alan.wilson@select.org.uk

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