Clash points

Pay-when-paid clauses are controversial, however, they are driven by commercial necessity. There is only one player within the construction process with the funds required to pay for the work: the employer. It should also be remembered that section 113 is a compromise originally proposed by subcontractors.

Rudi, quite rightly, points out that insolvency can place impossible burdens on the supply chain. But that applies to main contractors as well as subcontractors. The legislation shares the risk among the supply chain. It seems to me that subcontractors wish to have the benefits of closer relationships with employers – direct access, early involvement in the design process and full supply chain partnering – yet are not prepared to shoulder any of the risks.

Equally, what Rudi omits to mention is that section 113 only takes effect if a provision is incorporated into the contract. It is not necessary to include such a provision in order to comply with the legislation; it is a matter of negotiation between the parties.

It is also one-sided to look at the rights given under section 113 in isolation from the mosaic of other rights under the Construction Act. The dates when subcontractors receive payment are now clearly set out in the contract, and failure to receive payment on that date triggers an immediate right to adjudication or even suspension. If these provisions are properly implemented, they limit exposure as a result of insolvency.

Finally, turning to Rudi's point concerning the definition of insolvency: this is irrelevant. The pay-when-paid clause, if it is incorporated into a contract, only takes effect if payment is not made. Rudi contends that, as the purpose of administration is to keep the show on the road, it should be excluded from the definition. This would make a mockery of the provision.

A main contractor that does not receive the sums owing to it is not interested in the technical differences between administration or administrative receivership. The important issue is the breakdown of cash-flow along the supply chain. If an employer is in administration and payments continue to be made, it will flow to the subcontractor, and any pay-when-paid provision will not bite. The commercial realities of the construction process demonstrate that the risk of insolvency is a risk best shared throughout the supply chain, and therefore the exemption Rudi proposes is inappropriate.