Reputational Risk of Non-Payment

Payment conditions and practices are some of the biggest discussion points and complaints dealt with by the Legal and Contractual Department.  Payment provisions in Building contracts define the payments to sub-contractors based on progress and receipt of payment from the client (pay-when paid clauses).

According to the Construction Industry Development Board (CIDB), sixty percent of the subcontractors have experienced payment delays from main contractors, which were not linked to any fault of the subcontractor.  Such issues have led to numerous subcontractors being reluctant to work with main contractors who have a reputation for not paying on time.

The pay when paid principle, extremely unpopular amongst subcontractors, is a typical practice used in the day –to-day construction project, and has been acknowledged as standard practice, according to the study by the CIDB.

The pay-when-paid principle is inherently a response to the payment practices by clients, who do not comply with the payment requirements themselves. Given the low profit margins in the industry, cash flow management is critical for success and any delays have a significant effect on smaller companies without the necessary cash flow.

Upfront payments are further very rare and only afforded to certain subcontractors on a case-by-case basis who have a good working relationship with the Principal contractor.  It is important to keep in mind that the pay-when-paid principle is not applicable in instances where it is a labour-only subcontractor, who are treated the same as employees.

In recent months, the MBA North has become aware of these practices of non-payment by some main contractors.  It is predicted that subcontractors will exert their power as a collective to refuse to do work with a main contractor that has a bad reputation for non-payment.  This will have adverse effects on the Principal contractor.

Keeping all of this in mind, the MBA North advises main contractors to ensure that they limit their risk through fair payment practices.  As the Construction industry is a tightly knit community, non-payment of subcontractors will lead to a reputation being made in the industry.

It is important to address disputes with subcontractors regarding non-payment as soon as it arise, as it could lead to various litigation processes, dispute resolution and legal fees.

Should you experience difficulty with payment from a government institution, or a Principal contractor, do not hesitate to contact the MBA North to assist you through the process.

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