This month’s contract clinic question comes from a contractor whose client is refusing to pay for work that’s been invoiced for. Aqeel Haque looks at what recourse is available
We’ve not been paid for work we believe was correctly invoiced, on time and in accordance with the contract. The employer isn’t replying to emails and insists it’s not their problem. What can we do?
Delayed payments are a widespread issue in construction. They are often reluctantly accepted and even tolerated by some contractors. The Housing Grants, Construction and Regeneration Act 1996 introduced a requirement for a paying party to notify the amount due at specific points during most construction projects. However, correct notification of the amount due represents only the first hurdle. The actual receipt of payment can be difficult to obtain.
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Contractors face a difficult dilemma. Taking a hard line with clients and enforcing contractual rights can seem commercially aggressive. On the other hand, a failure to react can cause operational issues, strain supply chain relationships and even impact team morale.
Common causes
Delayed payments in construction are influenced by various factors. These include issues such as a lack of funds or inflexibility and excessive bureaucracy in employers’ procedures. Despite attempts to reduce it, there is often a dependency on upstream payments – the ‘pay when paid’ effect. Finally, there is a tendency among some employers to delay payments simply to improve cashflow.
Delaying payment may seem beneficial to the payer in the short term. However, it is ultimately detrimental, straining relationships, disrupting project flow and leads to increased costs, damaging the industry’s reputation.
Your statutory and contractual rights
Under section 112 of the Construction Act, Contractors have a statutory right to suspend work if payment is not made as required. This right is actionable after giving at least seven days’ notice. It can continue until full payment is received. The defaulting party is also liable for any reasonable costs incurred due to the suspension.
Standard forms of contract such as the JCT and NEC provide mechanisms to address non-payment. These include the ability to charge interest on overdue payments, suspend works, and even terminate the contract if non-payment continues over a longer period.
How to address non-payment
When faced with non-payment, you should take a structured approach to resolve the issue to help maintain the relationship with a client. Here are some steps to consider:
- Understand and monitor payment terms. Your invoicing department and project team should be aware of the contract payment terms and schedule. These should be monitored closely. Be proactive in addressing any discrepancies or delays as soon as they arise.
- Communicate early and clearly. Initiate dialogue with the client as soon as the payment is overdue. Sometimes payment delays are due to a simple misunderstanding or administrative errors that can be swiftly resolved.
- Issue formal notices. If the initial communications do not resolve the issue, issue a formal notice of non-payment. This notice should outline the outstanding amount, the due date and reference to relevant contract clauses. Check your contract to ensure you deliver the notice in the correct format.
- Seek advice. If non-payment persists, consult with someone experienced in dealing with non-payment matters to explore further actions.
- Follow the contractual procedures. Keep to the specific procedure outlined in your contract. For example, under the JCT contract, you are entitled to charge interest on late payments (clause 4.7.7) and suspend works after a set period of notice (Clause 4.8). Ensure all actions are well documented and in compliance with contract terms.
- Make use of statutory rights. If the contractual remedies are inoperative, leverage your statutory rights.
- Consider formal dispute resolution. Engage in formal dispute resolution methods such as small claims or adjudication.
Preventive measures
Preventing non-payment issues begins with establishing strong foundations at the outset. Conduct thorough financial checks on the paying party to assess their financial stability and payment history. This can be achieved through credit agencies and obtaining references from other firms.
Ensure that all payment terms and schedules are clearly defined and agreed upon in the contract. The contract should outline the payment milestones, conditions and consequences of late payments.
Additionally, verify that the client can realistically deliver on the agreed payment terms. If you have agreed 14-day payment terms, can this be achieved with the client’s accounting and approval processes? Regularly follow up on submitted payment applications and invoices and maintain detailed records of all communication.
Provided you have followed the requirements of your contract and any notice conditions, there should be no reason in law or contract to withhold payment. If you feel payment is being withheld unreasonably, then communication is key: if communication fails, seek external advice to ensure you’re following the correct process.
If all else fails, then formal dispute resolution may help to resolve the issue.
Aqeel Haque is senior consultant with Decipher (A DeSimone Company).
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