Increasing concerns about payment and cashflow issues in the construction industry in the UK means that everybody who reads this will be acutely aware of difficulties in the current marketplace. What I would like to do in this article is to share some recent experiences and to highlight some recommendations to allow businesses to find a way through an exceedingly difficult period.
What we have experienced recently is a number of significant failures of contractors and subcontractors in the UK, and there is no doubt that these failures result in a trail of devastation for the supply chain. I have been involved in a number of recent cases featuring payment and cashflow issues, and the level of difficulties that are being experienced is extraordinary, and after 40 years in this industry I do not think I have seen so many issues arriving on so many projects.
So, here are some suggestions and recommendations for you to take on board:
Firstly, you should consider using an experienced individual to carry out a quick analysis of any contracts you may be bidding for, and have them highlight high risk clauses to allow you to discuss these matters with who you are tendering to, with a view to having some of these high risk clauses removed or at least mitigated. There is no point in doing this exercise when your tender has been accepted. The time to do it is at the tender stage, and you can then decide if you want to proceed with tendering the contract.
Payment schedules – it is critical that you have a payment schedule in your contract, and this will set out the dates when you make an application for payment, what you need to provide, and when the due and final dates for payment are, and when a payless notice must be issued. You need to stick religiously to these dates to make sure that your applications are submitted on time because if they are not the chances are that your application will go into the next payment cycle.
Another issue relates to when the payment schedule runs out and, for example where a job runs past the last date in the schedule, you need to make sure that the schedule has extended until you reach practical completion.
Payment applications – this is another major problem for the industry in that applications are often rejected or reduced because you have not provided the relevant information to support what you think you are due to be paid. Too much information is better than too little information.
Make sure youfollow-up each payment application with a phone call to to establish that they have all the right information to process your application. There is nothing worse than getting to the end of the month and you receive a payment notice and you find that your application has been shredded and that has a significant impact on your projected cashflow for the business.
Notices – make sure you follow what the contract says about sending notices to the contractor of the employer. If it tells you notices must be sent by email and registered post, then comply with that. If it says that notices must go to individuals and an organisation, then make sure that happens.
Chasing payments – I spoke with an SME who said to me that if his payment is not received by the final date for payment, he will issue a notice to suspend the performance of his obligations on site the next day. You are perfectly entitled to do this because the contract says that you can suspend the performance of your obligations, and I find that this is a wakeup call to make sure that you get paid.
Troubled signs – you will soon pick up in situations where the contractor or the employer is not paying you in time or is reducing payments, and it is useful to share intelligence with other subcontractors on the project. You can quite often get an early indicator if the contractor or an employer is in trading difficulties and there is a possibility of them going into administration or liquidation. If that happens, then you will not get a penny. So, my advice is to keep your ears and eyes open.
Records – keeping records is critical, so do not hesitate to send emails confirming what's going on. Some of my clients say to me they do not want to 'ruffle feathers', and my response to that is the only thing you should be concerned about is your own business. Standard contracts allow extensions of time to be granted and loss and expense to be paid, so simply comply with what the contract says.
Quality – this is still a major issue for that industry in the UK. The Quality Improvement Initiative is a major step forward to ensure that quality is improved on all construction projects. What I have experienced recently is that increasingly of my clients been charged with contra charges for failing to rectify defective workmanship, failing to remove rubbish on-site, and failing to comply with health and safety regulations.
Adjudication – I have had some experiences recently when we issued a Notice of Adjudication to a defaulting party, and we have had an immediate response with my clients getting paid. I have written before about the Low Value Adjudication Procedure which gives parties a fixed fee to have an adjudicator appointed and to run an adjudication, so you should take advantage of these low value schemes.
Conflict Avoidance Process (CAP) – many SMEs have signed the RICS Conflict Avoidance Pledge, you can Google this sign up in five minutes and you can use this process as an early intervention to prevent issues escalating into disputes. This initiative is now gaining a lot of traction throughout the UK, and I am a huge supporter of it. It helps you cut off issues at the pass and allows you to get issues resolved and to continue building the project. Here is a link: www.rics.org/capledge.
Finally, keep your eye on the ball. Keep a close watch on your cashflow, and which contractors and employers out there are best to work with because they look after their supply chain. If you are working with an organisation that is a constant pain in the neck then it's time to say goodbye.
So, please take these suggestions on board and please read the CICV Best Practice Guide as this will give you a number of pointers on the way to improve the commercial management of your projects. We are in for a tough 12 months in this industry, and it will be the survival of the fittest who will get through this. It is desperately sad to see so many businesses failing and going into administration with good people been made redundant, and a reducing marketplace for other career opportunities. Much work is going on to improve procurement practices in the UK industry, but these will take time to work through.
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