The contractor's business model depends upon cash flow. Despite this fact, subcontractors commonly sign up to "pay when paid" contract provisions that severely hamper their cash flow. From the court cases there seem to be two lines of argument concerning these types of provisions:
- In Ontario and Alberta, "pay when paid" clauses divest the risk of non-payment to the subcontractor unless and until the GC is paid; whereas
- In Manitoba, Saskatchewan and British Columbia the courts have interpreted "pay when paid" clauses to restrict only the timing of payment and have deemed the subcontractor to be entitled to payment within a reasonable time after it completes its work, irrespective as to whether the General Contractor (GC) has been paid.
Either way, a "pay when paid" clause has the potential to detrimentally affect cash flow. In the current market place, GCs are more inclined to strictly enforce these provisions, thereby increasing the subcontractor's risk exposure. Subcontractors would be well advised to reflect these risks in their bids.
For designers and contractors who are anxious to maintain a minimum cash flow the temptation to low-ball bids is obvious. Before making this decision, designers and contractors must ensure that they are properly informed as to:
- The risk profile of the project as it affects them;
- Their liabilities - open-ended liability and indemnities should always be avoided. If the owner's schedule is unrealistic the contractor should make appropriate allowance in its bid for the cost of extended contract time or penalties;
- Any provisions cascaded from other contracts - commonly subcontractors are bound to provisions in the prime contract, in which case it is essential that subcontractors actually read and understand the prime contract provisions that will affect them;
- The payment terms - designer and contractors should familiarize themselves with the degree of discretion the contract affords the owner to withhold payment, the reasons for doing so and the owner's set off rights; in addition the parties' rights to recover consequential damages should be excluded;
- Securities required - in a recession, owners are less likely to waive their requirements for securities, conversely, they may insist on on-demand bonds. The consequences of providing on-demand bonds must be understood by the principal;
- Notice periods for claims - a number of Revay's clients are now regularly enforcing conditions precedent and rejecting late claims;
- The warranties provided - by way of example, often overlooked are the warranties concerning the skills and competencies of the workers the contractor is to provide. This is pertinent because most contracts permit termination and enable the owner to resort to the contractor's bonding company on the basis of the contractor's failure to provide a properly qualified and skilled workforce;
- The ramifications on the mindset of staff - the perception that the ship is sinking will be palpably counterproductive. Rather, particularly in the current market, every success should be celebrated.
To avoid the contractor being preoccupied with money worries the owner must offer improved payment terms and pay promptly. As a result, contractors will likely offer better prices. To the contrary, the practice whereby owners give service providers and contractors the run around when it comes to bona fides invoices is becoming quite prevalent. In so doing, owners are unnecessarily jeopardizing the survival of service providers and contractors alike. Revay believes that ultimately owners will regret the lack of choice and competition that will inevitably stem from their current actions.
Owners interested in differentiating themselves should look to best practices in their own and other parts of the world. The Construction Clients' Group in the UK runs a scheme that enables a third party administrator to benchmark against their peers the performance of clients according to the manner in which they treat their service providers and contractors. The scheme has been operating since fourth quarter of 2001 and boasts the enrolment of over 400 clients. Good clients achieve "Client Charter Status" and are permitted to publicize their status, thereby differentiating themselves.
Inevitably some firms will be struggling to meet payment schedules. In this situation, the firm should seek to renegotiate payment terms at the earliest possible opportunity. Needless to say, a successful conclusion will be more likely if the firm approaches the negotiations armed with a well rehearsed and realistic plan for repayment that reimburses the creditor for its opportunity cost.
1. See http://wwww.clientsuccess.org