Subcontractors elated over the DTI's proposed changes to the Construction Act; contractors call plans a ‘burden'
Sweeping proposals to reform payment practices have come under fire from main contractors, which have taken exception to government plans to change the Construction Act to give extra protection to subcontractors.
The DTI issued a revised set of changes to the Construction Act on Monday, after spending six months analysing industry responses to its consultation on payment and adjudication procedures. The essence of the proposals is that the reforms will give subcontractors greater power to demand payment from main contractors.
Alun Michael, the DTI minister in charge of construction, said: "In the wake of the consultation it seems clear there are procedural and commercial obstacles currently affecting the construction market in the operation of contracts under the legislation."
Michael acknowledged that some industry groups would be unhappy but defended the department's stance. He said: "Some elements of the package offer more to certain sectors than others. There is sometimes no easy answer but the developing consensus within the construction industry and its stakeholders remains a realistic aim to improve certainty in the payment and adjudication framework."
The proposals, which have been attacked by main contractors, include:
- Clarification of what payment is due and when: under the act at the moment there is no legal requirement for a main contractor to clarify when it intends to pay a subcontractor. Under the revised act there would be a timetable.
- Removing pay-when-certified clauses: the main contractor is now only obliged to pay the supply chain once work on the main contract has been certified complete by the client. Under the reformed act this would no longer be the case.
- Allowing subcontractors to claim for losses when suspending work over payment: under the act as it exists, subcontractors are liable for much of the cost if this occurs. Under the reformed act subcontractors could claim compensation for their losses and expenses.
The confederation particularly objected to proposals to clarify when debt was due, saying the burden could restrict parties' ability to contract. It also criticised the government's announcement that it would consider restricting or removing pay-when-certified clauses, which allow main contractors to withhold payment.
Both moves were hailed by specialist groups, including the NSCC and the Specialist Engineering Contractors Group. Rudi Klein, chief executive of the SEC Group, said: "The DTI is edging closer to a solution to the payment problem, particularly establishing when a debt is due. Their way of dealing with the problem is maybe over-complex, but it is heartening that it is getting to the nub of the problem. Addressing pay-when-certified clauses is also to be welcomed."
Suzannah Nichol, chief executive of the National Specialist Contractors Council, praised the proposals. She said: "It's fabulous that the DTI is moving to change the legislation."
David Pollock, director of the Electrical Contractors Association, also hailed the changes. He said: "Many of the key issues that concern our members have been identified in the consultation report."
Sir Michael Latham, who chaired the original review of the Construction Act and acted as adviser on the proposed amendments, said: "Clearly there are sections of the industry that are disappointed. There is still all to play for and no doubt they will make their views known."
The government intends to publish the proposals as a consultation document in the spring, allowing industry time to respond for the 2006/07 parliamentary session.
Both sides will lobby the government over the changes, with subcontractor groups continuing to seek measures on issues such as the absolute removal of pay-when-paid clauses, which can still be employed in cases of upstream insolvency.
Construction Act proposals at a glance
Payment proposals benefiting subcontractors
- Requirement to certify the sum and date due
- Introducing a right to apply for payment when a certificate is not granted
- Consider making all pay-when-certified clauses ineffective
- Allowing subcontractors to claim for loss, expense and remobilisation cost when suspending work over payment difficulties.
Payment proposals benefiting main contractors
- No intention to stop allowing pay-when-paid clauses in cases of upstream insolvency
- No plans to redefine content of withholding notices
Adjudication proposals welcomed by both sides
- Adjudicators who resign in response to a challenge to a jurisdiction to be entitled to payment
- Prohibiting the use of “trustee stakeholder accounts” to suspend an adjudicator’s award to a company
‘It’s a good step forward, but more work needs to be done’
Trevor Hursthouse, the managing director of M&E contractor Goodmarriott and Hursthouse, told Building in September that £950,000, or a quarter of his firm’s balance sheet, was tied up in retentions. Hursthouse believes that the latest proposals from the DTI indicate a real chance for change, but says more still needs to be done to help firms like his.
“For us the big issue is the payment measures. The DTI has identified that there’s a problem with defining the amount to be paid and the date payment is due, which is good news. Now, the DTI has to come up with a simple solution. The proposals put forward seem unnecessarily complicated, and there can’t be any room for doubt if the measures are to work.
“We are hopeful that this consultation will make a real improvement, otherwise is will be a costly waste of time. We have to assume from this consultation that the DTI intends to change the current situation.
“However, I am concerned they don’t seem to be addressing the insolvency issue, an area where there is a huge risk for subcontractors. You only have to look at what happened when Ballast went down. While any form of pay-if-paid clause is still effective, contractors are not protected from upstream insolvency. It’s a good step forward that the DTI has recognised the crucial payment issues, but more work needs to be done before the act is amended.”