Amit Kathpalia, MRICS, FIE, FICCP, AFFMASCE, Member SCL (UK), Infrastructure Contracts Specialist and Trainer
Delayed payments are endemic in the construction industry the world over. Lower tiers in the construction chain (subcontractors and suppliers) are more susceptible to this. Delays are prevalent in all types of payments in the industry – progress payment, milestone payment, interim payment, final payment, return of retention money and performance guarantee. The major effects of payment delays are:
- Cost and time overruns
- Cash flow problems
- Increased disputes
- Insolvency and bankruptcy
Many countries have attempted to find legislative solutions to minimise such delays. The first such legislative solution was the enactment of the UK’s Housing Grant, Construction and Regeneration Act, 1996. The act legislated the following provisions to enable timely payments:
- Mandatory provisions for time-bound payments in all construction contracts, and a default mechanism in the absence of such provisions.
- Banning of “pay if paid and pay when paid” clauses.
- Right of contractors and subcontractors to suspend performance in case of delayed payments.
- Statutory fast (28 day) “interim binding” adjudication applicable to all construction contracts, based on the concept of “pay now argue later”.
Legislations, based on a similar concept, were subsequently enacted in Australia, New Zealand, Ireland, Singapore and Malaysia with varying degrees of success. These were the Construction Contract Act (Australia and New Zealand), the Security of Payment Act (Singapore) and the Construction Industry Payment and Adjudication Act (Malaysia).
Lien model: US and Canada
Mechanic’s lien: Mechanic’s lien is defined as an involuntary security granted by law to all construction project participants for labour or material provided for the project/property. Involuntary security means that the lien exists irrespective of the owner’s consent. This implies that anyone who has not been paid his due amount for his contribution to the construction project (contractor/subcontractor/ supplier/labour) can file a lien which gives him a right to the property that has been developed. This document attaches to the land records and anyone who subsequently purchases the property does so with the lien liability attached. Mechanic’s lien is applicable to 50 states of the US and in vogue has been in vogue since 1790. Though this is a powerful tool available to contractors/subcontractors to get their pending dues, it is an extremely laborious process. Mechanic’s liens have encouraged resolving payment-related disputes in construction projects through alternative dispute resolution mechanisms and by employers playing a proactive role in enabling timely payments to stakeholders.
Payment Bonds – Miller’s Act: The Miller’s Act was legislated by the US federal government in 1934. The act requires all main contractors bidding for government projects to submit payment guarantee bonds to the employer which guarantees payment to all subcontractors and suppliers for the balance unpaid dues at the end of the project. Most states in the US have enacted similar acts for their state-funded projects called “Little Miller’s Act”. Release of balance dues to the subcontractor/supplier/labour from the payment bonds also obviates the filing of a mechanic’s lien by them.
Canada has as a similar Construction Lien Act, 1990, which also incorporates a seven-day payment rule for payment to subcontractors.
French 1975 Law
French Civil Law, Article 75-1335, dated December 31, 1975, legislates three provisions for timely payments to subcontractors and suppliers:
- Mandatory payment guarantees by the main contractor (to be ensured by the employer).
- Civil liability of the employer to ensure timely payment to subcontractors.
- Employer to make direct payment to the subcontractor in case he is not paid his dues within a month by the main contractor.
Regular and smooth cash flow forms the most important part of a construction project. Timely cash flows need to be enabled down the contracting chain since any of the stakeholders (subcontractor/supplier/labour) can delay or even derail the project. Various countries have adopted different legislations to enable this in construction projects, and these have largely been successful. India does not have any such specific legislation. Apart from making subcontractors and suppliers vulnerable, this also has a detrimental effect on the construction project.
Apart from legislative solutions, we can also have contractual and administrative solutions to enable timely payments in the construction industry.