Late Payments And Its Effect On Construction Projects
By: Chandeline Jordaan
Posted on: 16 January 2023
The most basic understanding of a contract in the construction industry is that the contractor will complete works as per the agreed scope, and the client will pay the contractor for the said completion of works. This process occurs monthly for construction projects.
The quantity surveyor (herein after referred to as the QS) on the project is responsible for compiling a valuation monthly for the value of works completed on a project. Thereafter the principal agent receives this valuation from the QS to certify the valuation. The principal agent then issues a payment certificate to the contractor, who in turn issues an invoice to the QS for inclusion in their payment schedule. The QS issues the payment schedule to the employer which includes the invoice due for payment to the contractor.
As stated in the JBCC Principal Building Agreement, Edition 6.2 May 2018 (herein after referred to as the JBCC PBA), Clause 12.1.7, the employer shall pay the contractor by the agreed due date as stipulated in the contract. Clause 25.10 states that the employer shall pay the full certified amount as per the payment certificate. This must happen within fourteen (14) calendar days of the issue date of the payment certificate. This is unfortunately not always the case. The employer sometimes fails to make payment, or only make partial payments, of invoices due to the main contractor, which has consequences on the project as a whole.
These consequences of no, or late, payment include, but are not limited to:
- Delay in contractor paying workers on site;
- Delay in contractor paying sub-contractors;
- Time and progress delay on site.
How do you approach payments not made by the employer?
Once the employer does not pay the contractor, it causes a delay to the complete supply and production chain of the project. According to Clause 25.14, the contractor may give five (5) working days’ notice to the employer to comply with the agreed terms of the contract. Should the employer continue to fail in initiating the payment of the full outstanding certified amounts within the five (5) days, the contractor may suspend the works (as per Clause 25.14.1), exercise his builder’s lien and take possession of site if it has not been waived (as per Clause 25.14.2), or call up the guarantee for payment (as per Clause 25.14.3). The contractor can only waive his builder’s lien and take possession of the site when the employer offers a guarantee for payment in turn. If a contractor suspends the works, or exercises their lien, it does not solve the problem of non-payment.
If the main contractor on a construction project is not paid, they cannot pay the nominated and selected sub-contractors, domestic subcontractors, suppliers, or their work force on the project. This causes a distrust amongst role-players in the project and may lead to contractors and sub-contractors declaring bankruptcy. This again leads to a further loss of scarce skills in the construction industry and an increase in unemployment.
What can contractors do to protect themselves?
To protect themselves against the possible consequences of non-, or partial payments from the employer, the main contractor needs to request for a payment guarantee from the employer in the contract data when submitting their tender. This enables the contractor to call on the payment guarantee from the financial institution who issued it, and request for payment of the amounts as per the payment certificate issued. This ensures payment will be made to the contractor should the employer be unable to make the payment at any stage of the project. As per Clause 11.10, the contractor waives their lien of possession upon receipt of a payment guarantee (which is issued by a reputable financial institution) from the employer. A payment guarantee from the employer is the most effective way to decrease any delays and consequences as a result of non-payment.
Sub-contractors are also more commonly requesting deposits (or advance payments) of 70% or more, before they start with their scope of works. Even though these sub-contractors are unable to provide a guarantee for the advance payments, they would rather forego the opportunity of an appointment than be appointed without an advance payment. Most of the sub-contractors see this as their only way of protecting their companies and interest where the employer is unable to make payments.
What can you as QS do to improve payment processes?
Although the JBCC PBA provides sufficient guidelines of the payment process from the compilation of a valuation to the issuing of a payment certificate, this does not ensure an employer will make payment. Should the contractor suspend works because the employer has failed to make payment, the principal agent will revise the date for practical completion once the works resume on the construction site, with an adjustment in the contract value (as per Clause 28.4). It is therefore in the best interest of all parties involved to ensure payments are done to the value of payment certificates issued, and that payments are made timeously. This can also be achieved by amending Clause 25.10 from fourteen (14) calendar days to thirty (30) calendar days. This extends the period in which payment needs to be made to the contractor, and manages the expectations of the contractor.
To ensure your construction project runs without any payment delays or disputes, it is important to have a realistic conversation with the employer regarding the cost of the project and the projected cash flow required. Most non-commercial clients are unfamiliar with how the required cash flow on construction projects works, and therefore it is the QS’s responsibility to ensure that the client understands the cash flow issued to him. It is also important to issue an updated projected cash flow schedule to the employer monthly to manage the employer’s expectations and enable him to plan his monthly expenses. In return it is the client’s responsibility to raise concern when the projected cash flow for a certain month is too high and create a payment plan and procurement strategy around the limits set by the client.
Open communication is crucial between the employer and the principal agent on the project to ensure that should any cash flow problems arise, the project program can be adjusted, if possible, to accommodate these problems. This will further establish trust amongst the construction team and ensure all parties to the project are fulfilling their responsibilities.