Making a difference to companies all over the country, Melbury Construction Consultants specialise in providing advice on a whole host of contractual disputes that can be encountered in the industry.
Peter Heatley, Managing Director, spoke to UK Construction Media about the company’s services and in the first of a three-part interview, he focuses on issues arising from Late Payment.
Some of the services that you offer deal with issues of non-payment and late payment. How common an occurrence is this in the construction industry?
It is a common occurrence throughout the construction industry and it happens at all levels from the employers to main contractors, and from the main contractors to the subcontractors.
There are two elements to it; it can happen during the course of a contract. So if you’ve got a contract due to run for a year and are supposed to have monthly payments, each of those payments can be late or delayed, and when you get to the final account stage, sometimes that can be late or delayed.
This can cause significant cash flow problems for the people being denied the payments and we’ve seen recently that there are high percentages of late payments so it is quite a considerable problem.
Are there any examples of what you encounter with this?
The most obvious problem is where the company themselves have got cash flow problems so if they haven’t got the money coming in, they’re going to have difficulty paying money out. This has a knock on effect throughout the supply chain which can, eventually, lead another organisation towards insolvency.
Our clients do experience the effects of that but I think also, there are contractors who are aggressive in their management of cash flow. So they will hold onto money if they think they can get away with it.
In terms of solutions, sometimes a letter from Melbury can cause contractors to make payments when they have not responded to our clients for quite a while. A letter from us can resolve the problem because the other side realises the person who hasn’t been paid is taking it very seriously.
So your company has the type of influence in this industry that by sending out a letter, issues can be resolved. What typically do these letters entail?
It depends upon the individual case but, for example, the Construction Act requires Payment and Pay Less Notices to be issued and sometimes we’ll hear from a contractor who’s hasn’t been paid and has not been given any Payment or Pay Less Notices but they’ve submitted an application for payment. In that case, a typical letter from us might say: “Our client made an application to you on such a date. There has been no Payment or Pay Less Notices issued. The final date for payment has passed and you have no defence to payment of our client’s account. Please can you do so otherwise it will go to adjudication.”
Providing that it arrives on the right desk and that it is understood the other side recognise they’ve got something significant with regard to continued non-payment that can often cause the payment to be made.
Where it’s not as clear cut as that, with claims and counter-claims, we would write a letter and articulate our client’s case as to why they are entitled to what they’re saying.
Again, on many occasions, the people on the other side recognise what we do and the contractor or subcontractor we’re representing have now got advice and are prepared to make an investment in our services to get their entitlements.
In those cases, money can flow through in relatively short order.
By working with companies in the industry, how do you ensure that late payment and non-payment are no longer issues on contracts?
There’s no one silver bullet. Our approach is to put a strategy in place with our client that works towards minimising the risk to them of late or non-payment. Part of that process will be to look at the contract terms they’re signing up to and make sure the payment provisions are clearly defined so they know when they’ve got to make applications and when they should expect payments.
We find a lot of contracts are written in such a way that they describe in great detail what has to be issued in an application for payment, they might say for example that it’s got to include five ingredients and if it doesn’t it’s not a bona fide application for payment and will be dealt with in the next monthly cycle.
So a client can put an in application but if they don’t comply with the letter of the contract, they could risk losing entitlement to an interim payment. They would see that as late or non-payment, though contractually it probably isn’t. We would make sure that our client understands what the payment application programme is and complies with it, and that clients are addressing it in a timely way.
For example, we had one client, about 18 months ago – they came to us around February and had been working away on a job but hadn’t been paid since the previous August. They were out of pocket by about £450,000, surprisingly they had maintained an optimism that things were going to be ok.
They asked us to get involved and we started an adjudication for them but as soon as we did this, the other side became insolvent so our client lost all the money.
In an ideal world, they would have contacted us when the first payment was missed and we would then have provided advice for them from that point in time, putting pressure on the other side to make the payments due then before it became a £450,000 problem.
Is that something that you as a company encourage, others to get in touch after the first non-payment?
Absolutely, because the point to remember is if you’re a contractor or an employer that is seeking to limit the amount of cash going out of your business, you’ll first pay the businesses putting you under the most pressure. It could be people you need on the site or those threatening to suspend work under the contract so what you have to do is make sure you’re at the top of their thought process and they realise they won’t get away with non-payment to you.
Part of that process is Melbury getting involved so the other side realise the problem is not going to go away.
What are the wider-reaching benefits of this service? Could it be the difference between a company’s future or not?
Very much so, and this is an issue which we have encountered. If somebody loses a lot of money on a big contract it can cause them to become insolvent and this is something which can happen throughout the supply chain – one of the big contractors which went into administration about six years ago was a company called Connaught none of the supply chain expected it, and it did cause two other contractors, to my knowledge, to become insolvent.
One of our clients experienced that and it was partly because they had big outstanding debts that were never recovered so getting the cash in is critical to the health of the business.