Tips for contractors on how to get paid

28 January, 2009
by: Cripps

In these increasingly difficult times for the construction industry, it is more important than ever to ensure that your business is paid in full and on time.  

 

At Contract Stage

The most important time to ensure that your business will not experience payment problems is at contract stage.

Firstly, you  must  ensure that your agreement with your employer is evidenced in writing with a clearly defined payment mechanism.  This payment mechanism should state the amount to be paid to you and provide for regular interim payments (whether this is on a monthly basis or at set stages of the works).  In doing this, be aware that for “construction contracts” (defined in the Construction Act), if the mechanism does not comply with the Construction Act, the statutory scheme will apply, which may differ from the payment instalments you wanted, leading to a potential dispute over cashflow.

This payment mechanism should then be supported by:

  • an appropriate suspension and termination mechanism if payments are not made on time;
  • provision for you to retain title over all goods and materials   bought by you and used in the works until paid for; and
  • robust dispute resolution provisions (making sure, in particular, that adjudication or summary judgment are available as quick methods of resolving and enforcing disputes).

If you have a suitable contract in place, but are still worried about the financial stability of the payer, there are ways to strengthen your security. A parent company guarantee is a well-known security strategy, but the use of escrow accounts, for example, is becoming increasingly common to make sure some of the payer’s money is “ring-fenced” for payments to you.

What happens if a payment is missed?

If an interim payment is not made by the final date for payment under your contract, there may be a number of options available to you. As a common sense measure, negotiation with your employer may be the best way forward so that relations with it are preserved. If you tell your employer straight away that you have not been paid and ask for a reason why, you may find there is a simple reason that can easily be sorted out.

Alternatively, you may consider suspending performance of the contract. Even if there is no express right of suspension under your contract, section 112 of the Construction Act will probably be available to you. This mechanism entitles you to serve a 7-day notice on your employer stating the ground or grounds on which you are proposing to suspend your performance. If the payment has not been paid on the expiry of this period, you may then suspend performance until you have been paid the monies properly due to you.

Most contracts (for example, the standard JCT contracts and most standard appointment forms) will contain a provision stating that if the period of suspension carries on without payment for a set period (say, 2 months) then you may terminate the contract. If your contract does not contain this express provision, there is no statutory right to terminate the contract. However, there may be an argument if the suspension goes on for some time that the employer has terminated the contract through non-performance and you have “accepted” that termination.

Retention of Title

Another issue of concern where payment is missed, particularly for contractors and sub-contractors, is whether you still have title in the goods and materials that you have bought for the works (particularly if these goods and materials have now been incorporated in the works). You may find that you have not been paid for these (particularly if the employer has become insolvent) but that you are still having to pay your suppliers for them.

The key here is to analyse the contract with your employer. Hopefully, there will be a clause in your contract whereby you have retained title until practical completion. It may be that you can then organise a meeting with your employer to get the goods and materials back. It is not advisable to physically go back to site without permission, as you may be trespassing on site which could lead to further trouble (particularly with the police!).

If your contract is silent on the point, the general position is that materials brought onto site remain your property until they become fixed to the land (i.e. are built into the works). Once they are affixed to the land, they become the property of the owner of the site and you may not therefore legally remove the materials without express permission.

A practical tip to carry out from the outset of a project to help you in any subsequent dispute is to clearly label all the goods and materials you supply for the works, so your goods and materials are easily identifiable from those supplied by others. It would also be beneficial when initially contracting with your employer to arrange for advance payment of certain goods and materials and for your interim payments to be able to include payment for off-site materials.

In addition, be aware of your contractual position with your suppliers. If your supplier has a retention of title clause which states that title in any goods or materials supplied only passes to you upon payment for those goods and materials, and you have not paid for these, then the supplier may be using any means possible (legal or not!) to get these back. You will probably also owe a duty to look after these goods properly through the law of bailment, so make sure you have adequate insurance in place to cover the goods whilst they are in your possession. 

The ideal position in this scenario would be if you received title to these goods and materials upon delivery of them, rather than on payment for them. This is a point to check at an early stage when initially negotiating your contract with the supplier.

Conclusion

There are a number of ways to help ensure that you get paid in these difficult times. The most important is to have a proper agreement in writing with your employer which clearly sets out when and how you will be paid, and what happens if you do not get paid (i.e. suspension / termination provisions and dispute resolution procedures).

If a dispute does occur, you will need to consider issues such as your ability to suspend or terminate your contact, whether to bring a claim against your employer and whether you have retained title in any goods and materials supplied.

Reviewed in 2015