Cash is the lifeblood of any business and without it employees, suppliers and even the tax man cannot be paid. Delayed payments have long been an issue in the construction industry and businesses have failed in the past for this very reason. The introduction of the Housing Grants, Construction and Regeneration Act in 1996 (often referred to as ‘The Construction Act’) sought to address some of these issues and encourage prompt payment – especially for smaller and medium sized enterprises. For more details see LPA 66 – Overview and Review of the Construction Act Payment Provisions. Specifically Part 2 of the Act sets out several principles for construction contracts; the right to staged payments, determining when payments are due; the requirement to state the amount due and how it was determined; the need to serve notice of intention to withhold payment; the right to suspend work in the case of non-payment. The Act also makes provision for disputes to be taken to adjudication. This has recently proved to be a means of rapidly resolving disputed debts especially where the withholding party has failed to abide by the contract conditions in relation to payment and the requirements of the Construction Act.
Nevertheless many debts are not paid in a timely manner and there are a number of actions AGS members can take to minimise delays to payment.
Actions AGS Members should take to minimise delays to payments
Know who the client is
The most critical factor is making absolutely sure who the client is and who therefore has responsibility for payment. It is not uncommon for initial enquiries to come from what turns out to be a third party with the result that the quotation is sent to them and provided a suitable set of terms and conditions is attached to the offer letter, then arguably a contract exists. However when the work is completed the supposed client then requests that the invoice is addressed to another company who will then pay the invoice. This then leaves the debtor with a dilemma as to whether to pursue the party he agreed the contract with, or readdress his invoice to another party who is apparently willing to settle the debt.
A similar dilemma may exist where a contract has been set up with a client who then, at the point of invoicing, requests that the invoice be re-addressed to another entity within the client organisation. The same problem may also arise when the client provides a purchase order which on closer inspection has not been issued by the original client entity.
In all these scenarios the debtor runs the risk of trying to recover a debt from an entity with whom he has no contract. By doing so the debtor effectively gives up his right to pursue the debt through legal means as clearly there is not a contract between the parties.
In such situations the logical course of action would be to pursue the debt with the body with whom the debtor is contracted. Whilst re-addressing the invoice may seem to be expedient, it should be borne in mind that, as well as the legal issues with trying to pursue a debt this way, the protective clauses in the contract may not be enforceable with this new entity
Financial stability of the client
AGS members should also be wary of contracting with clients with a weak balance sheet who may have an impaired ability to pay (also see AGS publication ‘Risk Issues for Independent Geo-professionals’, Section 4 Contractual and Financial Issues). Information on UK registered companies can be found on the Companies House website. This will usually include a copy of the client’s published accounts, as well as details of the company structure and names of the directors. However please be aware that accounts may only be published up to 9 months after the end of the company’s financial year, so the accounts may relate to a trading period that ended up to 1 year and 9 months ago. Even when dealing with large organisations it is worth checking the accounts of the specific entity which the holding/parent company may or may not have chosen to capitalise. The dangers of contracting with a financially robust company, only then to pursue a debt with a company that is not so, are obvious. Where there are doubts over the ability of the client to pay then it may be appropriate to request an advance payment for part or all of the fee. Where clients impose extended payment terms then the consideration should be given to including finance costs in the fee based on a suitable weighted average cost of capital (WACC).
Problems with purchase orders
Another pitfall in debt recovery is the lack of a purchase order. Many companies’ accounts payable systems are increasingly automated and a lack of relevant information on the invoice can result in invoices being rejected. Even when the correct client entity has been identified and a binding contract agreed between the two parties, payment can be delayed due to the lack of a purchase order. Whilst it may be contractually superfluous, the absence of a purchase order may simply mean that payment will not be processed until such a purchase order is issued. It is recommended therefore that AGS members communicate with the client’s finance team at an early stage to check whether a PO is required in order avoid delays and problems later. Also remember that purchase orders may have a monetary cap and where there are variations to the scope of work then this can result in the cap being exceeded at some point. Again AGS members can avoid payment delays by checking that the cumulative invoiced amount is within the capped amount on the PO.
On the other hand clients may inadvertently issue a PO to the incorrect contracting entity. This can easily happen when companies merge, are taken over or rename/restructure. This can result in clients accounting systems having an incorrect VAT number and incorrect bank details leading to further delays in payment.
In summary the Construction Act provides protection against unjustified withholding of payment and allows debtors to recover debts through adjudication if necessary. However a number of actions can be taken to minimise payment delays:
1. Check that the contracting entity is correct and is the body who will make payment.
2. Check the financial strength of the contracting entity.
3. Where possible check the payment history of the client and consider requesting advance payment and, where there are extended payment terms, consider including finance costs in the price.
4. Check whether a purchase order is required in order to facilitate payment.
5. Check that the PO has been issued to the correct entity.
6. Check that the PO value has not been exhausted from previous invoices.
7. Resist requests by clients to re-address invoices to another company.
AGS (2011). Risk Issues for Independent Geo-professionals. May 2011.
AGS (2018). LPA 66 – Overview and Review of the Construction Act Payment Provisions – February 2018.
Article contributed by Peter Boyd, Operations Director, Ground Engineering, AECOM
This article was featured in the September/October issue of the AGS Magazine.