In our years of experience at CRS, we’ve found that contractors often don’t spend enough time negotiating their legal position before signing a contract with a developer, particularly when it comes to the issue of payments and their being withheld.
Spending a little effort to negotiate an understanding between contractor and developer can save both parties considerable time and money should it come to a dispute later down the line.
As it stands, such disputes are a common feature of the construction industry and can cause a tremendous drain on the cashflow and subsequent livelihood of contractors.
The team at CRS have seen countless cases of construction insolvencies which could well have been avoided had enough attention been paid to the details of the contract.
Here are 5 things contractors should bear in mind before signing on the dotted line…
- Short payment periods
It is in the contractors’ interest to ensure payment periods are as short as possible; the contract must specify both the due and final date for payment, the former usually being set at one month after works commence.
It is in the developers’ interest, on the other hand, to extend the period between due and final date for payment – this can aggravate cashflow issues for contractors with their own costs and wages to pay.
It’s important that contractors know their rights in this case; according to the Scheme for Construction Contracts Regulations 1998, a contractor has legitimate argument to negotiate a period of 17 days between the due and final date.
- Set-off clauses
Look out for cross-contract set-off clauses!
Some developers will incorporate these into a contract, allowing them to withhold payment under one contract due to the contractor allegedly owing them under another contract, usually on the grounds of some defect in the work.
Those in the construction industry will be well familiar with these; whereby a percentage of the total sum (usually around 3-5%) is withheld until the contractor has fulfilled their contractual obligations.
In light of Carillion and rising construction insolvencies, here are some things for contractors to bear in mind when it comes to retentions. Ensure the retention amount is as low as possible, and that the money is securely ring-fenced.
- Suspension of work
A contractor can suspend work if they have not received payment on the final due date without service of an appropriate pay less notice, under the Housing Grants, Construction and Regeneration Act of 1996.
The obligations of a contractor suspending work are these: reasons for suspension must be specified and seven days’ notice must be given. If valid, suspension will allow the contractor more time for completion of work as well as a reasonable amount for costs and expenses incurred.
- Time extensions
These are generally permitted where a delay cannot be attributed to the contractor, for example adverse weather conditions or variations under the contract.
Otherwise, late completion can result in serious repercussions for the contractor in terms of liquidated and ascertained damages.