No thumbscrews required

In an industry where cash flow is king and cash management is difficult at the best of times, receiving regular payments is essential. This article focuses on measures contractors and subcontractors can take to make it easier to get paid, without resorting to litigation or adjudication.

How do I negotiate better payment terms?

There’s no better time to set out your ground rules than at the start of a project. This means negotiating a contract that sets out clearly the risks and responsibilities each party is agreeing to take on. Measures that can help maintain cash flow are:

• Advance payments - These may be appropriate where significant spend is needed on items with a long lead-in to secure the availability of plant, materials or subcontractors at the right time. However, employers will probably require such payments to be bonded
• Front-loaded payment schedule - This may be appropriate to assist with site set-up costs and ordering items with long lead times where advance payments are not made
• Direct payment from the project’s funder - Direct agreements with funders are common, but funders will not agree to make direct payment unless they are able to step-in to the contract and keep the project whole
• Escrow accounts - Increasingly used when there are cash flow issues, an escrow account is a bank account from which funds can be released provided certain conditions are met. If an employer is a newly established company or there are concerns about its ability to pay, it may be appropriate for money to be paid into an escrow account. If such an account is set up, you need to make it clear who is entitled to any interest due, how the money should be released and to whom if one party becomes insolvent
• Retention - Ask the employer not to deduct retention from payments due to you if you provide it with alternative protection in the form of an on-demand bond. This will assist with managing cash flow and will protect you against non-release of retention money if an employer goes insolvent
• Bonds/guarantees - If the employer has a parent company, it may be appropriate to ask for a payment guarantee from it. Although these are rare in the UK, it may be possible to obtain one if your project has an international element. Make sure any such guarantee provides that the guarantor gives its consent to any amendments to the building contract, or the guarantee could become invalid.

You should also carry out credit checks to get an idea of the employer’s current financial position, although this will only give you a snap-shot of the position at that time.

You should carry out credit checks to get an idea of the employer’s current financial position, although this will only give you a snap-shot of the position at that time

 

What can I do to protect myself during a project?

• Monitor the behaviour of others on site. Are they leaving site or complaining of late payment? This could be an early warning of employer difficulties.
• Make regular applications for payment in compliance with the time periods set out in the contract. If you are paid late, or believe you are entitled to additional time or money, be sure to make any such claims within the contractual time periods to avoid time bars.

What should I do if my employer goes insolvent?

• Check the provisions of your contract and then secure plant and materials accordingly, especially if plant is needed on other projects
• Not being paid will have an impact on your ability to pay your supply chain. Check the payment provisions of your subcontracts and supply agreements. The Construction Act’s prohibitions of pay-when-paid provisions do not apply where there is upstream insolvency
• Keep aware of any insolvency proceedings and, where necessary, submit a proof of debt to try to recover a share of any money due to unsecured creditors. If you have the benefit of a bond or parent company guarantee, check you can call on that security and ensure you comply with all procedural requirements

Although there is no foolproof way of ensuring you get paid, it is easiest to get the best deal at the outset. Then, once the project has started, comply with the contract terms, make sure payments are requested on time and notices are issued if payment is late and keep your ears open for any early warning signs that the employer is in difficulty.