The accusations this month that collapsed subcontractor Vaughan Engineering had been using Carillion’s liquidation as a ‘smokescreen’ to hide its own poor payment record will not surprise many in the industry.
While clearly a concern, this trend reflects the pressures construction companies are facing – and we can be fairly sure that the alleged practices at Vaughan Engineering are far from the only such instances across the wider industry.
Balancing cashflow, project management and delivery, resource planning and skills acquisition is no easy task in any climate. But with the added pressures of rising material costs and the continued uncertainty of the Brexit outcome, subcontractors have been among the first to suffer.
Construction Act fit for purpose?
Legislation does exist to help businesses get paid on time, namely the Housing Grants Construction and Regeneration Act 1996 (as amended), known as the Construction Act.
The act was introduced at a time when construction companies were among the most vulnerable in any sector, and was designed to speed up cashflow in the industry. It sets out a number of rights for companies within the supply chain, including the right to be paid in interim, periodic or stage payments, the right to suspend performance for non-payment, and the right to adjudication.
However, is this enough – particularly in light of current market challenges and with insolvencies on the rise?
The chief executive of the Building Engineering Services Association (BESA) has already criticised the various voluntary schemes that exist and called for prompt payment legislation backed up by tough enforcement.
“Ultimately, this is about companies putting in place the preventative measures and reactive processes to protect themselves”
Together with the Electrical Contractors’ Association, the BESA has also met with the business secretary to discuss supporting payment security measures such as placing retention money in ringfenced deposit protection scheme, project bank accounts and public contracts payment models.
For now though, the onus is on contractors to ensure their internal credit control processes don’t delay taking action before it is too late.
Measures of protection
There are a number of steps contractors can take to protect themselves.
Some relate to contracts: for example, have they been signed off and is it clear what basis the parties are contracting on?
Others concern legacy documents such as terms and conditions – are they up to date or do they need a fresh look? This kind of document can often end up being an amalgamation of numerous redrafts over the years, but any ambiguity creates uncertainty and can lead to different views on what each party is required to do.
It is also important to consider dates for notification of payment, particularly who is responsible for monitoring if payments have been missed, as well as how long to wait before challenging if any grounds for withholding payments seem debatable.
Ultimately, this is about companies putting in place the preventative measures and reactive processes to protect themselves in case of missing or delayed payment. After all, squeezed margins and external market pressures show no sign of letting up.
Whether Carillion related or not, we can expect to see more accusations emerging like those aimed at Vaughan Engineering.
Anjon Mallik is a construction partner at law firm, Gordons