FIS Consultant Len Bunton shares his concerns about the payment and cash flow issues in the construction industry in the UK.
“Everybody who reads this will be acutely aware of difficulties in the current marketplace, and what I would like to do 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 as 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 who have been involved. What members need to do is to minimise risk. I have recently been involved with a number of FIS members in dealing with payment and cash flow 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.
Below, Len provides some suggestions and recommendations for you to take on board.
FIS has set up a Contract Review Panel and you should use these experienced individuals to carry out a quick analysis of any contracts you may be bidding for and to highlight high risk clauses to allow you to discuss these matters with who you are tendering to with 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 and your commercial managers should have these dates in their calendar 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 your commercial managers follow-up each payment application with a phone call to the contractor 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 cash flow 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 a FIS member yesterday 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. Your 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 the contractor and the employers 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’s are in trading difficulties and there is a possibility of them going into administration or liquidation, and 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 that you are being delayed or you are being denied access or you cannot get on with your work for reasons out of your control. The same goes for applying for extensions of time and if you are delayed then notify the contractor or the employer of the reasons why you are being delayed and give early notification of an extension of time. Some of my clients say to me they do not want to “ruffle feathers” in 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 from my clients getting paid. I have written in my Blogs 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) – FIS has 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 and this is now gaining a lot of traction throughout the UK, and I am a huge supporter of. 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 cash flow, and which contractors and employers out there are best to work with because they look after their supply chain, and if you are working with an organisation that is a constant pain in the neck then “kiss them goodbye.”
So please take these suggestions on board and please read the 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.
FIS is a tremendous organisation that looks after its members, and you can get a wide range of interest on technical and commercial matters.
FIS Contractual and Legal Toolkit
As well as our vocal stance on unfair payment practices, FIS members can access a range of services to support them in managing the complexities of contracting and supplying products into the construction market, this includes template contracts, guidance on standard terms, support in dealing with disputes and a raft of best practice advice.
FIS publishes short blogs by its Consultant Len Bunton on contractual and commercial issues he experiences when supporting FIS members and the wider community – it is designed to help FIS Members avoid common traps and build on the FIS focus on collective experience. The blogs are published fortnightly as FIS member only content and released to SpecFinish two weeks after publication.
Len provides an initial free one hour consultation to FIS members to discuss and review specific issues and to help develop a strategy to address. Should further advice and support be necessary, thereafter then Len will agree the necessary fee levels with each FIS member.
You can find out more about FIS membership here.