Delayed Payment in Construction

Delayed Payment in Construction

Payment for contractor in conduction industry needs to be on time to improve contractor’s cash flow and contractor effectiveness to complete the project on time. For some reason, delayed payment has become a norm in the construction industry and is one of the biggest challenges for the contractors in many parts of the world.

Causes of Delayed Payment:

Here are some of the reasons for delayed payment in construction industry:

• Employer may not have the necessary funding arrangements
• Employers delay the payment for their own financial advantages
• Complex process and procedure for payment review, certification, and release of money
• Lack of proper process implementation
• Unrealistic Cash flows
• Disagreement on the valuation of works at site.

In some cases, contractor also contribute to this situation by not providing adequate supporting documents, making incorrect valuation, or maybe not following the procedures.

Contractual Provisions for Delayed Payment – FIDIC Red Book – 1999

 Sub-Clause 14.8 [Delayed Payment] deals with the consequence of the delayed payment

 If the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 [Payment], irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued.

 Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment and shall be paid in such currency.

 The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy.

 In case of the default from Employer, contract provisions entitle the Contractor to additional finance charges without being required to give any formal notice or certification.  In addition to the above provision, contract also empowers the contractor to suspend or reduce the rate of work in case of delayed payments. If the contractor believes that the situation warrants extreme measures, then contractor will be entitled to terminate the contract.

Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work] and Sub-Clause 16.2 [Termination by Contractor] deals with the contractor’s right to suspend the works and terminate the contract, respectively.

Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work]:

By giving 21 days’ notice, contractor may suspend work or reduce the rate of work if Engineer fails to certify the payment in accordance with Sub-Clause 14.6 [Issue of Interim Payment Certification] or Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangement] or Sub-Clause 14.7 [Payment]

Sub-Clause 16.2 [ Termination by Contractor]:

 Contractor will be entitled to terminate the contract, after giving appropriate notices, if

• Employer does not comply with Employer’s Financial Arrangement [Sub-Clause 2.4.
• Engineer fails to issue the Payment Certificate within 56 days after receiving statement and supporting documents from contractor.
• Contractor does not receive the amount due under an Interim Payment Certificate within 42 days after the expiry of times stated under Payment Sub-Clause 14.7 [Payment]

If the contractor suffers delays and/or incurs cost because of suspension or reducing the rate of works, then the contractor will also be entitled subject to Sub-Clause 20.1 [Contractor’s Claim] for an extension of time and cost.

As part of the administration of the contract, Engineer to avoid late payment repercussions, should:

• be fully aware of the Contract provisions for timely payments.
• Advise the Employer of the due date for payment once the payment is certified.
• follow up on payment status and request the Employer to advise the Engineer whenever the amount is paid to the contractor.
• if certified amount is not paid to the contractor, then prior to the due date, Engineer shall promptly remind the Employer to make payment by the due date. Engineer shall also and remind employer of the potential contractual consequences for not making a payment on time.

FIDIC Conditions of Contract sets out the clear procedure for the Contractor to adopt in case of delayed and or non -payments. But, in most of the cases contractor refrain from exercising their contractual rights as part of their long-term strategy to maintain a better relationship with the employer or may be due to the lack of contractual knowledge.

On a final note, making payments to the Contractor in full and on time is the Employer’s contractual obligation. In case of default, Contract will be entitled to exercise their contractual right which can even lead to the termination of the contract.