Prepare for the worst

Getting paid the amount applied for and on time is difficult: the fluid nature of project design and the multiple levels in the supply chain are contributing factors.

Design changes spawn variations that require valuing. Often the costs need substantiating by invoices and documents. This takes time and negotiation and is the breeding ground for late payment and disputes. It is exasperated by the need for negotiations to pass through the contractual chain from perhaps sub-subcontractor to the employer’s quantity surveyor, each party attempting to recover his costs and to maximise his profit.

Valuation is complex and is done by contractors and building professionals who are experts in their field. It is not like selling bananas – “Yes, sir, a dozen? That will be six quid.” There are no arguments with such a simple transaction. It cannot be compared with the calculation of interim and final accounts.

Preparation

Faced with these procedures, contractors must put themselves in the best possible position to get paid a reasonable sum and on time. Success requires preparation and patience. This column deals with the former.

Contractors often hold pre-order meetings with prospective subcontractors. These can be the most good-natured gatherings that will occur throughout the project – neither side has a dispute at this stage. Both parties should use this time to collect information about each other, including all contact details – address of head office, regional offices and accounts department.

Subcontractors must establish who the employer is. They may need to contact the employer at some time in the future. This may seem obvious advice, but it is not uncommon for a subcontractor to be unsure of who they are in contract with.

Once identified, the potential client’s credit rating can be checked using a credit data provider such as Experian. Reports detail directors and owners, recommend a credit limit and give a risk score for the organisation. County court judgements will also be listed.

A view can then be formed regarding the financial risk involved in contracting with them. Seek advice from an accountant or other adviser if a report proves to be complex.

A bank reference or ‘status enquiry’ may be sought with the account holder’s co-operation. The bank may charge the enquirer a fee for this service and will give its opinion on the ability of its customer to meet a specific financial commitment.

However, it is not a guarantee of payment and should be used only for small value assessments.

Trade references can be checked, but ensure you are happy with the supplier selected as referee. Your client is unlikely to suggest an organisation that they have a debt with.

It is imperative that contractors are familiar with the payment clauses on each contract

Networking is invaluable to identify bad payers. Contact other contractors on site and at trade association meetings.

Ensure a copy of the relevant contract terms and conditions is obtained, together with all contract documents. If the contract is a standard form – for example, JCT 2005 Standard Building Subcontract – be wary of and obtain details of any main contractors’ amendments.

The usual procedure is to incorporate a list of amendments to the standard form as a contract document. This presents the subcontractor with the time-consuming task of collating the documents.

It is imperative contractors are familiar with the payment clauses on each contract. Establish when the first payment becomes due, the payment intervals (generally one month but can be longer) and the final date for payment.

This is most critical and must be established accurately, in accordance with the contract, as any subsequent actions, such as suspension of works due to non-payment, will only be valid if the correct date is used.

Swept away

Without this information, a contractor cannot establish whether a payment is late or not. Terms on quotes and invoices will be swept away in the contractual process by the time a payment is made.

Note the final dates for payment for the whole contract and chase the payer immediately they fail to pay on time.

Establish the retention to be held and pay attention to the provisions for release. It is not unheard of for a two-year defects liability period to be slipped in.

Be certain of your own intentions regarding a discount, and always stipulate ‘cash discount for prompt payment’. Be aware that standard forms of subcontract no longer have discount provisions.

Establish the dates for receiving payment notices and withholding notices and record them too for easy reference.

Be prepared for the worst.