Payment practice needs to catch up

Specialist contractors need to take the bull by the horms and demand fair payment for work done before it is brought to site, says BCSA Legal Director Marion Rich.

How many times does the situation arise where work has been undertaken prior to starting work on site? For steelwork contractors, and increasingly for other trades, most of their work has been done before site is reached but this type of work is frequently not regarded as ‘work’ undertaken under the sub-contract for which payment needs to be made. Under most subcontracts the payment cycle does not start until work on site begins.

The suspicion must be that the system arose in the days when most work was done on site. Those days are long gone.  Steelwork contractors are highly specialised in the use of new technology for fabricating steel, for planning and delivery.  Payment practices should reflect what happens now, not what happened 100 years ago.

Standard Forms

A review of the standard forms of contract shows that the problems largely lie with DOM/1 and DOM/2. DOM/1/2 and its ‘bespoke’ derivatives are by far the most common form of sub-contract despite JCT’s publication of DSC. Like the JCT forms, the procedures and wording have become so familiar within the industry to have become regarded almost as a form of ‘construction common law’; people feel ‘that is how things are done’. While it is not fair to say that most standard sub-contract forms perpetuate the practice of refusing to acknowledge work done before site is reached, it is fair to say that most sub-contracts do.

The payment terms of DOM/1 provide that the first payment is due one month after the date of commencement of the Sub-Contract Works on-site or if agreed, related off-site works.

In other words, if the Architect and Employer choose, then the Sub-Contractor may be paid for off-site goods and materials. It is viewed as some type of concession to get paid at this stage at all.

DOM/2 conditions are in essentially the same terms; this is itself of interest, as one would have thought that there is good reason for a design and build contract to allow payment to be made at the design stage. In practice, of course, much design is done by subcontractors even when engaged on a DOM/1 basis.

This payment provision sometimes leads to another problem: materials are often brought on site too early, under the provisions of clause 21.4 of DOM/1, simply for the purpose of starting the payment cycle.

In the other major forms of contract, the same problem does not arise to the same extent. In the Civil Engineering Contractors Association form of sub-contract, the sub-contractor’s valuation of all work properly done under the sub-contract is to be submitted to suit specified dates or as otherwise agreed and the Engineering and Construction  sub-contract ties start of payment to the ‘sub-contract starting date’ set out in the sub-contract data.

SPC 2000, the specialist contract that goes with the PPC 2000 partnering contract, gives the opportunity for payments to be made under a Specialist Pre-Possession Agreement.

The GC/Works Subcontract provides for first payment date to be agreed, with a default position of no later than 42 days after date of commencement of Sub-Contract Works – definition to be supplied in the Abstract of Particulars.

In all the above contracts, it is very much up to the sub-contractor to ensure that it gets the contract right for payment to start at the right time.

DSC/C provides for the first payment to become due on the date of issue of the Main Contract Interim Certificate immediately following the commencement of the Sub-Contract Works. This is described in the Numbered Documents. If the works are described adequately in the Numbered Documents, therefore, the commencement would presumably be the time that the first action covered by the description was begun. However, it is apparent that the fall back position is still for the start of the payment cycle to be linked to start of work on site.

Modern Forms of Working

There is an important point for the industry as a whole here. It is not simply individual sub-contractors that find their lives made more difficult because they are funding the project bottom up. Off-site fabrication has come to be seen as the way forward. It allows faster, more certain, safer construction. However, who in their right mind is going to move to off-site fabrication when they will not start to get paid until after start of work on site?

Supply chain integration requires of sub-contractors a great deal of work in the design and planning stages. This is going to be a huge change in working practice in any case for a number of smaller contractors; linking payment to start of work on site is not going to make it any easier.

The obvious answer is that new forms of working will bring in new forms of payment and work is being undertaken at the moment by the Strategic Forum for Construction on payment mechanisms for integrated supply teams.

But change may not come easily; even the most innovative contract writers have had to compromise. The Guide to SPC 2000 justifies the need for a separate specialist contract as follows:

‘The terms of… performance, supply and payment vary considerably between the different types of Specialists and are broken down in different ways for different Projects. Accordingly, the diverse relationships between the Constructor and its Specialists need to be set out in separate forms of Specialist Contract.’

The way forward

There is a lot that the industry itself can do at a company level. It is clear that the feeling that ‘this is the way things work in the construction industry’ needs to be dispelled; we are dealing with a simple matter of contract. Individual specialists need the confidence to take the bull by the horns and demand fair payment mechanisms that reflect the work they do off-site.

Those higher in the contractual chain need to accept that work carried out before site is reached is work under the contract, and deserves payment.

With the publication of DSC, the DOM/1/2 sub-contracts are no longer going to be updated; eventually (although I suspect it may take a long time), these forms will fade away. DSC, NEC and PPC2000 will become more commonly used, the new payment mechanisms being developed for integrated supply chains and teams will come on stream.   The ‘norm’ will eventually change and payment will begin to be made for work done. My purpose is to encourage that change and speed it along.

A version of this article appeared in Volume 14 Issue 7 of ‘Construction Law’.