One of the most common times we witness a significant payment dispute in large-scale construction is at the end of the job. Generally this takes the form of the principal seeking to impose significant reductions on the final payment claim, alleging various defects or incomplete works, or simply refusing to pay the final claim for no apparent reason.
Not surprisingly this is incredibly frustrating for our contractor clients, particularly when the final payment claim is often where a significant portion of job’s profit is realised.
But when we start to dig into the source of the disagreement, it becomes apparent that there have been many minor issues along the way that the contractor has simply let slide throughout the course of the contract. This can have a significant impact on the recovery that is possible and on the contractor’s rights. It can also mean that the profit on the job is a lot tighter than was expected at the outset.
So where is the balance to be struck? On the one hand we appreciate that most contractors want to apply a commercial and pragmatic approach to conflict resolution during the course of project delivery. This is often the path of least resistance while the project is underway.
On the other hand, those many smaller matters that arise throughout the course of the project which seem inconspicuous at the time can add up to a significant drain on the profitability of the project.
So how can you remain commercially reasonable with your principal without suffering the potential consequences down the track when you get to the pointy end of the job?
Always Comply with Your Contract
We’ve said it before and we’re likely to say again, the path of maximum protection throughout the course of a project is to ensure that you know and comply with your contractual obligations in terms of notices, timelines and payment claims.
Sometimes there is a perception that complying strictly with the terms of the contract will be viewed as overly pedantic, unnecessary or antagonistic. If you sometimes feel that way, consider this – the terms of the contract with which you are complying were probably insisted upon by the principal.
If the principal gets annoyed with you complying with the contract that the principal insisted you sign, then they can always request your agreement to amend the contract to delete those requirements.
In fact, we have seen some contracts where the requirements the contractor was supposed to keep were so onerous that not even the principal wanted to keep receiving the required notices.
But ultimately, complying with the contract is the surest way to get paid, protect your risks, and reserve your rights as you proceed. Doing otherwise leads to unnecessary complexity and cost down the track, as well as of course the risk that your claims will be rejected and you’ll have no legal recourse to recover them.
Don’t Let Everything Slide… in a Final Way
As we have mentioned above the temptation in order to retain good commercial relationships with your principal is to let a lot of disputed matters slide during the project. We appreciate this, and sometimes the more commercial approach will result in better outcomes and better relationships that will minimise disputes.
Other times, however, the principal is simply taking advantage of the contractor. The result is that the contractor lets a lot of issues slide throughout the contract (at its expense!), only to find it still gets jammed up with a massive counterclaim at the end of the project anyway.
If possible, we suggest in the event you reach an “agree to disagree” point on a minor matter during the course of the contract that you leave your options open so far as possible. That might mean that you continue to comply with the contractual process for the purposes of your claims, but agree (without waiving your rights) to do something in a particular way that the principal has requested.
At the very least this can leave open the possibility of raising the issue later, rather than simply becoming one of many losses that you suffer throughout the course of the contract.
This will not always be possible of course, but to the extent it is if you can retain a contractual right while simultaneously retaining good relationships with your principal and that is often the better choice, rather than simply giving in on every single point throughout the job.
Determine your Trigger Point Up Front
In some of the jobs we have seen that have gone south, the contractor has suspected for some time that the principal was either running out of funds or was intending to raise a significant dispute.
Often, the worst mistake the contractor has made is to commit significant resources to completing the job despite the principal’s default (for example, the last few payment claims have not been paid).
The theory that you will be able to sort everything out the job is done is often a deeply flawed one. In truth, once the job is finished the principal no longer has significant need for you is the contractor and is far more likely to delay payment or dispute your claims.
Of course it is a serious decision to cease work on a job and you need to do so in accordance with the terms of your contract. It will have both legal and commercial consequences, so we do not suggest making that decision lightly or without legal advice.
However, leaving the decision for too long can lead to serious losses and an inability to recover funds from what has become a defunct, assetless, shell of a principal.
You know your business better than anyone else does. You should have a good idea what exposure is too much, and what risk you are prepared to bear as part of the work you are doing. The best advice we can give is prior to commencing any job you understand and internally document the financial exposure that this job creates for you, how much tolerance for non-payment or lost profit your company can bear and what your trigger point is to consider having to take serious action rather than expose your company to further losses.
It is very difficult to make these sorts of decisions on the fly once a project has commenced, which is why we suggest making them upfront. While the specifics will vary case to case, this will at least give you a working understanding of how best to manage the ongoing ebb and flow of correspondence, claims, variations or directions that occur throughout the course of any contract, and spot any red flags along the way that might point to a need for serious action.