Show me the money
For a contractor, it’s essential to be paid on time and in full for work completed. Brian Seymour tells how to go about it.
A poor payment schedule causes severe cashflow problems and introduces a domino effect into paying wages, suppliers and sub-contractors.
Under the contract, a contractor or sub-contractor overdue for a progress payment is able to suspend work until the money is paid in full. This can jeopardise the entire project and threaten the liquidity of all involved.
There have been many studies into the causes of unrealistic payment arrangements. The main findings have been:
- disagreement on the valuation of work;
- errors in claims; and,
- unrealistic cashflow.
Any withheld payments will delay the project, in turn affecting the work schedule and leading to cost overruns and extensions of time.
It starts at the time of enquiry when you first discuss a project with the client or pick up the tendering documents.
Many contractors are too keen to get their teeth into a substantial project. They read the scope and details of the work but don’t pay enough attention to other clauses that will affect the financial outcome.
A signed contract
Don’t even attempt to start the job until you have a signed written contract.
If your client is unwilling to sign the contract, this should ring warning bells.
Even if you are a small contractor specialising in residential work, you need a contract. There are lots of templates on websites.
Your project may be a small refurbishment job for Mrs Jones, but the absence of a signed contract setting out the scope of work could easily lead to disputes at the time of payment.
Contractors carrying out small residential works, in which they have to complete the rough-in before the sheeting and finishing trades, often find that the client’s perception of the scope has altered.
It is usually the contractor who is short changed.
Read the contract
Who is the client and who is responsible for paying you?
Take note of financial obligations, such as the schedule of payments and the targets that initiate the progress payments.
Make clear provision for variations – who can authorise them and approve them for payment.
Also, spell out penalties for late payments, finance charges and the right to suspend work until payment is made.
Study the scope of work – the agreement that describes the work to be performed and contains any milestones, reports, deliverables, and end products that are to be provided by the performing party.
The scope should also contain the timeline, usually in the form of a builder’s schedule or Gantt chart.
Understand the critical dates set out in the contract – they can be devastating if you miss them.
Having read the contract and scope of work, do you have the resources to complete the job?
If this project requires a high level of sub-contractor expertise, or the hiring of specialised equipment that your opposition already has, are you wasting your time submitting a tender?
If your motive for attempting the project is to break into this type of work, then you will need to assess the overall cost to determine whether it is viable.
Ensure your invoices are clear, complete and correct.
Many claims are reduced or knocked back due to poor or vague details – inaccuracies in paperwork, incorrect terminology, incomplete dates and unclear payment methods.
Your invoices for claims should:
- identify the service;
- state the project and any identifying numbers or codes;
- state the dates applicable;
- state the details of the claim including any fees, duty and GST;
- state the monetary value;
- state payment terms; and
- confirm the date of retention release.
Check on the client
It’s essential to know who you are dealing with.
This industry has a history of projects that have ended in financial disaster.
Many disastrous projects have been conducted by developers that were less than authentic. They are known in the industry as the ‘Lazarus Disciples’ (arisen from previous failed projects).
You need to be aware of the potential risk associated with such companies.
If you have never worked for the potential client before, you must carry out a company search and check the credentials through your own industry. On a large project, it is wise to establish whether the client is capable of completing all aspects within the timeframe.
The aim of the Building and Construction Industry Security of Payment Act is to ensure that anyone who undertakes construction work (or the supply of related goods and services) under a contract is entitled to receive, and is able to recover, specified progress payments.
It is in your interests to download a copy of the act from the web.