This is at a time when news about construction companies running into financial problems, leaving unpaid subcontractors in precarious positions, is all too common.
The delayed payment or non-payment of accounts is, in many cases, crippling for a business, particularly for a small business. This leads to the question, what can be done about it? Particularly, how does a subcontractor reduce its risk of unpaid debts? While there is no silver bullet, we set out some basic suggestions below that will help subcontractors reduce the risk.
Conduct due diligence and know who you are contracting with
This may seem obvious but identifying the party with whom you intend to contract (the Other Party) is crucial when considering a construction project. Before you enter into a contract, ask for the Other Party’s Australian Company Number (ACN) and Australian Business Number (ABN) and obtain details about the Other Party’s licence. Once you have obtained this information, conduct a background check (including a credit check and licence check) and general research. Some red flags are where the Other Party:
- has high staff turnover;
- is using a different business name to one previously used; or
- has a history of disputes and non-payment (particularly to other subcontractors).
It would be a good idea to also speak to other subcontractors who have dealt with the Other Party.
Fair and reasonable contract
The contract is of critical importance. Risks and burdens under “standard” contracts are rarely split down the middle. Commercial factors dictate that subcontractors often have little choice but to sign contracts weighted in favour of the Other Party (in many cases, the builder). However subcontractors may still have the ability to negotiate a contract to some extent. In any case, they should understand what they are getting into so they can actively manage and reduce their risk.
The contract should generally contain the following:
- a detailed scope of works including an explanation of the services to be provided (and any to be specifically excluded) by the subcontractor, clear and precise specifications as to the materials to be used (including type and quality / grade) and all other relevant specifications. A failure to include a comprehensive scope of works in the contract is one of the most common causes of dispute;
- the amount that will be payable for the works (or the basis on which this will be calculated) and the terms and conditions and schedule of payment should all be set out in the contract. Payment for works should be by way of regular progress payments. There should be no confusion between the parties as to the cost of the services included in the scope of works and the means of determining the cost for any additional services outside of that scope. There should also be provisions clearly setting out a procedure for making, and responding to, payment claims;
- a schedule of works which (amongst other things) contains a construction start date, project milestones and a date for completion of works. The contract should also contain a procedure for the Other Party to update the schedule of works;
- provisions detailing the causes of delay that the subcontractor will not be responsible for. Depending on the circumstances, these may include delays caused by the Other Party or property owner in obtaining the required permits and approvals, delays caused by the Other Party or its subcontractor or delays as the result of site conditions or bad weather;
- provisions allowing the subcontractor to promptly stop / suspend work, without adverse consequences to the subcontractor, if a payment is not made on time;
- a clear and reasonable procedure for making a claim for an extension of time for delay that the subcontractor is not responsible for. This is particularly important where the contract provides for liquidated damages in the event that the subcontractor does not meet the date for completion of works. It should also be clearly stated whether the contractor is entitled to be compensated for costs/losses it incurs due to delays not caused by it; and
- the incorporation of all relevant documents. We frequently encounter disputes in which a party to the contract believes that a document (often the subcontractor’s quotation which may, for example, contain specifications or hourly charge rates) was supposed to be incorporated but the contract itself does not reflect this. Most contracts contain an ‘entire agreement’ clause, whereby the contract is stated to be the whole contract and that no other document (whether created before or after the contract was entered into) forms part of the contract. Relevant documents should therefore be expressly incorporated by reference in the contract.
Subcontractors should request that the following items not be included in the contract:
- provisions which set unreasonably short time periods for the subcontractor to act, including time periods for notification of variations to the scope of works or claims for extensions of time;
- provisions that grant the Other Party the right to accept or reject the subcontractor’s work at its sole discretion (without any objective standards);
- time bar clauses (i.e. a clause in a contract which sets a strict deadline within which either party may bring a dispute) that are unreasonable or onerous;
- lengthy payment terms (generally, the longer the payment term the greater the risk);
- liquidated damages that are disproportionate to the actual loss or damage likely to be suffered by the Other Party; and
- indemnification provisions that are too wide and/or do not include an exclusion for damage contributed to by the Other Party’s acts or omissions (or the acts and/or omissions of its other subcontractors).
Understand the contract and know your rights, duties and obligations
Again, this one may seem obvious, yet we regularly encounter subcontractors that do not understand, or are not aware of, their rights, duties and obligations under the contract. This can be particularly problematic where there are strict deadlines in the contract for the subcontractor to meet. Procedures should also be put in place by the subcontractor (and appropriate personnel appointed) to ensure that, as far as possible, the project runs smoothly and, in particular, key milestones are met.
Maintain Contemporaneous Records
It is vitally important that subcontractors maintain accurate and contemporaneous records including, where appropriate, site reports, diary entries and photographs. This may be the number one “take away” from this article. These records will serve as a reminder for the subcontractor when recalling matters later. They also, in the eyes of an adjudicator or other party determining a dispute, capture the reality of the events at the time they took place and, should a dispute arise, are likely to be given significant evidentiary weight as to what occurred.
If you have concerns regarding non-payment, act early. We are often approached for advice at a stage where the relationship with the Other Party is terminal and / or the Other Party’s financial position makes payment unlikely. Further, it may be appropriate for you to make an adjudication application under the Construction Contracts Act 2004. That application must be lodged, and served on the other party and the adjudicator, strictly within 90 business days of a payment dispute arising under the construction contract.
The following are common indicators that there might be issues with payment:
- the Other Party asks for an extension of time to pay the subcontractor;
- there is a pattern of late payment of the subcontractor’s accounts;
- the Other Party raises grounds for non-payment of accounts which are frivolous;
- the Other Party does not return the subcontractor’s phone calls or respond to emails (or there’s an unreasonable delay in the Other Party’s response); and
- the subcontractor hears that other tradies working on the project have not been paid for their work.
How we can help
To the extent that you are considering a construction project, Fletcher Law’s experienced lawyers can review the contract, advise you with respect to the issues and risks and negotiate on your behalf. If required, we can also prepare contracts for presentation to the Other Party.
If a dispute arises, Fletcher Law can provide pragmatic and cost-effective advice and, if necessary, assist you in making an application for adjudication or represent you in Court proceedings.