Avoid Becoming a Late Payment Victim in Construction

The Problem of Late Payment

The problem of late payment in the construction industry and its devastating consequences is common knowledge and evidenced in multiple surveys;  In the extreme it can result in the insolvency and liquidation of otherwise excellent contractors, sub-contractors and suppliers.  The worst culprits are often from the largest and the most powerful client groups.

Why Do They Pay Late?

Simply because it is lucrative and they can do so with limited or no consequences given that many SME’s are either unwilling or unable to stand their ground and fight their own corner.

What Legal Remedies Are Available?

All suppliers of goods and services in construction have statutory as well as contractual rights of timely payment.

The Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”) provides for payments to be made promptly throughout the supply chain. It does not stipulate payment periods but allows the contracting parties to agree the payment provisions and the contract to contain adequate mechanism for determining the same. In default The Scheme for Construction Contracts apply to impose a payment period of 17 days from the due date to the final date for payment.

The Late Payment of Commercial Debts (Interest) Act 1998, provides for simple interest to be payable on outstanding debts at the penal rate of 8% above the Bank of England base rate

The Late Payment of Commercial Debts Regulations 2013,  amend the Act by imposing a limit on payment periods which could be varied by mutual agreement provided the variation is not grossly unfair to the supplier.  Additionally it entitles the supplier to compensation for its reasonable costs of debt recovery.

Best Practice Remedies These are at the discretion of the client and can only be leveraged for the benefit of the supply chain if and when offered by the client.

Project Bank Accounts (please reference my previous article PBA’s)

Construction Supply Chain Payment Charter, launched by the government on 22 April 2014 to build upon the payment provisions set out on the HGCRA (as amended); The Late Payment of Commercial Debts Regulations 2013; The Fair Payment Charter; Cabinet Office Procurement Information Notes 2/2010 and The Prompt Payment Code.  Announced by the Construction Leadership Council and prepared by the Institute for Credit Management following consultation with clients, contractors suppliers and consultants, the charter sets out 11 fair payment commitments.

Small Business, Enterprise and Employment Bill  In November 2014 the government announced its intention to use the Bill to impose a duty on larger listed companies to report on their payment practices and performance.

What Practical Remedy Is Available?

The secret of avoiding the problem of late payment is a dynamic well-organised internal risk assessment alongside credit management procedures. Contractors should never enter contractual arrangements without properly assessing risks. It must be a prerequisite at the outset of every contract to establish a relationship between internal costs and valuation income to be maintained from commencement until the final account.  Any negative deviation should prompt protective action. If the cause is late payment or undervaluation then the contractor should employ pre-prepared standard procedures to promptly and amicably confront the client to redress the balance. If these procedures are legally skillfully drafted, it will ensure that the contractor does not become a victim of late payment.  Surely no client will enter delayed payment disputes in which there are limited prospects of success.

Samuel Okoronkwo is a practicing Barrister, London.

He specialises in Planning & PropertyConstruction & Engineering Law

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