GETTING PAID IN THE CONTRACTS JUNGLE

For most sub-contractors, “getting paid” is a constant problem. Clients and main contractors will use every trick n the book, it seems, to reduce and delay payments. All too often, the sub-contractor’s efforts to remedy this situation are implemented too late in the process (eg only when his accounts show that the payment is overdue and/or significantly reduced).

In fact, to be successful, the process of “getting paid in full and on time” should start at the outset – at enquiry stage, and be followed in a systematic manner throughout the progress of the works and the eventual final account. Some basic steps are set out below:

The enquiry and tender – identify and address the risks

Remember the “five W’s” :

· Who is the enquiry from?

· What is the work scope?

· Where is the work located?

· When will it be carried out?

· What is the credit rating of client and main contractor?

If the enquiry fails the above test, this is the time to politely decline. “Turn-over for turn-over’s sake” is of no benefit whatever. If the sub-contractor decides to proceed with the tender,

· Vet the proposed terms and conditions.

· Check payment terms and periods.

· Beware set off and other onerous clauses.

· Price the risk, or attempt to negotiate better terms.

Payment terms to beware of include :

· Extended payment periods.

· Pay when certified under the main contract.

· Unclear payment procedures.

· Conditions precedent (ie no payment unless certain pre-conditions fully complied with by the sub-contractor).

· No payment until all sub-contract documents, warranties, bonds etc executed and returned.

· “Pay if paid” in event of the end client’s insolvency.

· Excessive retention percentages.

· Retention release geared to the main contract defects certificate.

Letters of intent

Many letters of intent are virtually worthless, a recipe for financial suicide. A good letter of intent must include the following:

· Agreed sub-contract tender sum and work scope.

· Programme period and start date.

· Reference to the terms and conditions.

· Definite instruction to start defined work on a specific date..

· Promise to pay up to a stated sum if a formal sub-contract agreement is not achieved.

The order

It is understandable when a sub-contractor reacts gleefully to the receipt of an order for which he has worked so hard. However, when the celebration is over, it is vital to check the order in detail against the submitted tender.

· Check the value, including any discount and retentions.

· Check the programme dates and period.

· Check the sub-contract terms and conditions.

· Check the payment terms, dates and durations.

· Check for “counter offers” (ie new and onerous terms introduced into the order).

· Beware acceptance by conduct (ie signifying acceptance by starting work).

Getting paid on site.

Once on site, the sub-contractor should take urgent steps to ascertain the exact procedures involved in the payment process.

· Find out who is responsible for dealing with the sub-contractor’s interim application (usually the main contractor’s quantity surveyor).

· Make contact with the appointed person and discuss the process in more detail.

· Ascertain the level of detail and substantiation required for the application.

· Find out the dates by which applications must be submitted.

· Ensure the applications are submitted by the required dates.

· Provide full details and include sums in respect of any “claims”, variations, additional costs etc.

· “Get it in the budget” if you can. Nobody likes nasty surprises at the end of the job.

Monitoring and pursuing payments

The sad fact of life is that main contractors tend to push “nice guys” to the back of the queue. So the sub-contractor must set up a systematic procedure for monitoring and pursuing payment. This requires a lot more work than the traditional approach of waiting until the payment fails to arrive before taking belated action.

· Establish and monitor the dates by which the main contractor’s notification should be received.

· Chase immediately if an expected notification fails to arrive on the appropriate date.

· Establish and monitor final dates for payment (ie dates by which the cheque is expected).

· Chase immediately if an expected payment fails to arrive on the appropriate date.

· Consider giving notice of suspension if payment of the notified sum is overdue. (Be careful to check the number of days notice required under the sub-contract conditions).

· Demand reasons for under-payment. Consider threatening adjudication in cases of persistent or unacceptable late or reduced payment.

Protecting cash flow when on site

The sub-contractor needs to be commercially aware at all times. This awareness includes :

· Keeping good site records.

· Establishing authority on day one (ie who is authorised to give the sub-contractor instructions and to sign dayworks sheets etc).

· Obtaining written instructions before embarking on variations.

· Ensuring dayworks sheets are submitted promptly for signature.

· Promptly notifying all delays and additional costs.

· Applying for extension of time if the completion date is threatened by a relevant event.

· Applying for “claims” (ie delay and disruption costs) as soon as the situation becomes apparent.

Conclusion

It can be seen from the above that the process of obtaining full and timely payment is far more than just a “credit control” function. On the contrary, the process must be implemented at enquiry stage and maintained throughout as part of a disciplined set of procedures. In short, cash flow is everybody’s responsibility, not just the credit control clerk!

Based on my “Contract Law” column in “Electrical Times” published 1 August 06.

John Russell

Contracts and Training Consultant

Cheshire CW4 7DP

Tel: 07770 986444

Email: swsubbie@globalnet.co.uk

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