Late payments can have problematic effects on construction contractors. Can you suspend works for non-payment? Can you do so before it is too late?
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Construction contracts are far more complex than in other sectors because the risks which could impact on the successful delivery of a project are so broad. Whereas in other sectors sellers or service providers are paid upon delivery of goods, construction contracts run over many months and it is therefore not feasible for any entity to carry the costs of executing only to be paid at completion.
Late payment by an employer can have devastating consequences for a contractor’s business. The standard form construction contracts recognise this and in most cases, they provide the contractor with the ability to suspend or slow down the works should payment not be received on the specified due date.
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While there are other remedies available (such as charging interest on outstanding amounts) in practice I have rarely seen a contractor claim this entitlement to interest. It is much more effective to have the ability to potentially delay the employer’s project, especially given that this delay would be at the employer’s expense too.
Know your contract’s limitations
Standard construction contracts include interim payment provisions – usually payment for work done to date. Typically, a payment certificate is required to entitle the contractor, but this doesn’t guarantee that the employer will make payment timeously.
However, there are certain traps that contractors should be aware of. The most obvious snare is if the employer simply deletes the clauses from the contract that entitle the contractor to suspend the works. Quite simply, if there is no right to suspend written into the contract, you cannot do so.
The next trap is a ‘pay-when-paid’ clause between contractors and subcontractors. The difficulty that arises is that the due date for payment cannot be specified. It follows then that the point at which the subcontractor would be entitled to suspend works cannot be identified either.
Clause 31.15 of the JBCC Principal Building Agreement (July 2007) allows the contractor to give three working days’ notice to suspend works if payment has not been made or if a payment certificate is not issued. This, in turn, gives rise to an entitlement to an extension to the date for practical completion, with costs (Clause 29.2.12).
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That’s a pretty powerful remedy if you ask me. The majority of smaller contractors I work with are unaware of this clause in the JBCC suite of contracts.
My final bit of advice is not to discard all of your remedies when negotiating a contract. They are there for a reason and if your employer insists on taking these remedies away from you, make sure you have a back-up plan. Cash is king, after all.