Prevention is better than the cure: Managing cashflow in construction contracts

Issues such as delayed or reduced payment have been embedded within construction disputes since time immemorial.  However, new data highlights the sheer scale of the problems.  A survey by StreetwiseSubbie.com suggests nearly 90% of subcontractors have suffered from late payments, non-payment or tactics designed to lower the sums paid to them in the past 12 months.

In addition, figures from the Federation of Master Builders suggest that 70% of SMEs surveyed believe material costs will rise in the next 6 months, whilst just 20% consider they will be in a position to raise output prices.

The inevitable result is a continuing squeeze on margins at both ends.  The need to prioritise cashflow remains essential, while also ensuring proper payment is made for the work undertaken.  Managing this often means avoiding debates over payment entitlements wherever possible.

Attempts have been made by government to limit such difficulties. Changes twelve months ago to the Housing Grants Construction and Regeneration Act 1996 were designed to improve cashflow, remove onerous contract conditions and promote Adjudication as a fast track dispute resolution process.  However the latest statistics prove that difficulties over payments continue. So enough of the negative, what can you do to place yourself in the best position to avoid such difficulties? Here are some tips.

Dictate your own terms
If you are in the enviable position of being able to retain your own contract terms, take advantage of this by ensuring they are worded in your favour.

Knowledge is power
I am always amazed at how often I encounter entities, who have signed a contract without understanding its content.  When problems start, the contract is always the first place to look. Knowing your terms in advance is the key. Often in construction contracts there are conditions which require set actions within specific timetables. Compliance with such terms is essential and should be implemented as good practice throughout your organisation.



Understand your client
Ultimately good relationships tend to translate into better cashflow.  By understanding what it is your client is looking to achieve and their own difficulties, you will not only help them avoid issues, but also be able to see the warning signs.

Spot the danger
Hindsight is a wonderful thing, but it identifies decision-making or omissions which contributed to disputes.  Take the time to step back and view your position from an objective standpoint and avoid falling into the trap of complacency.

Record, records, records
Accurate records are often the difference between success and failure when a dispute arises.  Steps such as a daily contract record or photographic diary can make the difference, especially where issues arise regarding the nature and scope of work carried out.  The aforementioned changes to legislation allowing oral construction contracts to be referred to Adjudication reinforces the need for a reliable evidential record.  Any oral discussions or agreements must be followed up in accordance with the written contract terms.

It is impossible to exclude every issue with non or delayed payment.  However the above practical steps should limit their occurrence  and make them easier to resolve.  When faced with well-documented contract compliance and supporting evidence, the commercial balance between not paying and entertaining a formal dispute with the significant danger (and cost) of losing often shifts the balance in favour of paying up.

The above advice also applies to employers and main contractors.  Serious consideration should be given to the risk and reward to be gained from driving down price.  There is no doubt competitive pricing is achievable, but care needs to be taken not to move past the tipping point.  Achieving the desired quality can be risked by consistent non or reduced payment, alongside the damaging scenario of a half built construction project with an insolvent contractor.

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About Hugh Hitchcock

Hugh Hitchcock is a director at DJM Solicitors, a commercial law firm providing legal services to clients across the UK and Los Angeles, Hong Kong and Japan. His career spans 23 years spent in media and corporate law, and he specialises in dispute resolution. He previously spent six years at a leading media firm that acted for Elton John and The Beatles' record label Apple.