Maintaining cash flow in construction contracts
Good cash flow is essential for businesses in the construction industry as issues with it can often spell the end of a project and even an entire business, as seen with Carillion in 2018.
If procedures are not in place to ensure a healthy cash flow, debt recovery after the event can become obsolete.
Funds need to be readily available to contractors and employers in order to ensure that the goods, services and labour required to complete a project on time and within budget are available.
There are however rules concerning payment that are vital to the industry and, if not followed, can have a significant impact on employers and contractors alike.
What are the rules concerning payment timescales?
A construction contract is any contract under which a party carries out construction operations; these can be either written or oral.
Part II of the Construction Act and the Scheme for Construction Contracts (the ‘Scheme’) detail these mechanisms.
The Construction Act imposes strict timescales for payment and a procedure that apply to all construction contracts, as the implied terms implemented under the Construction Act cannot be contracted out of.
Where the relevant periods and dates are not accounted for in a construction contract, default dates and periods apply under the Scheme.
The Construction Act imposes strict timescales for payment and a procedure that apply to all construction contracts
The Scheme provides dates for when payments become due, known as the due date, being seven days after an interim valuation if not provided for in a contract. The final date for payment, in absence of an express term, is 17 days after the due date. Mechanisms for serving payment notices on an employer and the procedure for serving a pay less notice on a contractor, which sets out the proposed amount to be withheld from payment and a breakdown of why that amount is disputed, are also provided for within the Scheme.
In the absence of a pay less notice being issued by the employer, the amount requested in the payment notice by the contractor or sub-contractor must be paid, regardless of whether the amount requested for payment is disputed or not. This is normally enforced by way of an adjudication, known as a ‘smash and grab’ adjudication.
How to avoid debt recovery proceedings on construction projects
Recent case law has provided that adjudication can be challenged in the courts in some circumstances; however, this is an unnecessary and expensive step to take which can be avoided by ensuring construction contracts contain definitive and clear payment terms and notice periods.
Ensuring construction contracts contain these specific provisions helps to regulate cash flow through the business and ultimately can ensure payment is made regularly, avoiding the need for any debt recovery procedures being required.
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