The Biggest Reasons For Delayed Construction Sector Payments

One of the biggest frustrations in the construction sector is the myriad issues surrounding payment, and because both the financial and time commitments for construction projects are especially long, these problems are magnified relative to other sectors.

Deciding on the right price, establishing and following the right payment process and being aware of your rights and recourses in case of non-payment, less payment, or delayed payment is vital to avoiding significant cash flow issues.

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Prevention is often better than cure, however, and the best way to minimise your exposure to payment delays is to understand why they happen. Here are some of the most common issues and what you can do about them.

How Do Cash Flow Issues Lead To Late Payments?

There are many parties involved in construction, which creates a chain of payments not only between clients and project owners and their stakeholders, but between project management firms, contractors and subcontractors.

These supply chains can get quite complex and quite deep, incorporating designers, builders, sub-contractors and a huge range of specialists, all of which are relying on being paid for their work according to their contract.

If the contractor or building firm is not paid on time, then all of their subcontractors risk also not being paid, creating late payments and risking cash flow issues and insolvency.

How Can You Stop Cash Flow Issues Causing Payment Problems?

• Undertake due diligence on any clients to ensure they are able to pay and what risk factors could lead to delays.

• Set clear payment terms and the process for non-payment.

• Discuss the best payment option for the client, including how much they can pay upfront and at particular milestones.

How Can Project Disputes Cause Payment Problems?

It is vital to ensure that all stakeholders are on the same page when it comes to the project, and there is a clear, unified definition of completion of the project.

If there is not, there can be an impasse when it comes to agreeing on when or if the contractor should be paid, a process often known as retention. Without this clarity, expensive and time-consuming disputes can potentially cause cash flow issues.

How Can Project Disputes Be Minimised?

• Have clear, defined milestones quantified by an independent third party.

• Maintain clear communication and document the entire project, any changes required and any approvals for adjustments.

• Maintain an open dialogue to ensure that potential issues are solved as soon as possible.

How Can Unclear Payment Terms Affect Payment?

There should be no room for doubt or ambiguity when it comes to payments, and every element of the process should be detailed in the contract, with work only starting once both parties agree to the terms.

What Payment Terms Should Be Included In Contracts?

• A schedule for payments, with an agreement on when payments begin, when payments need to be made and which milestones lead to payments.

• The retention percentage and the terms for practical completion of the project.

• The procedures for payments, the amount due and the terms under which deductions may be applied.

• The process for managing variations in the work, such as additional required work, changes to the scope and changes to materials.

• The procedure for resolving disputes including how and when arbitration or mediation proceedings will take place.

• Late payment fees or interest are liable on late payments if they are made after the stated deadlines.

• How inflation will be accounted for.

• How damages will be paid if a contract is breached.