Devil in the detail: contractors risk ruin due to contract fine print, payment delays

A lack of ethical treatment, payment delays and unfavourable contract terms are putting building contractors under unreasonable pressure.

The Master Builders Association (MBA) North says contractors – particularly small and mid-sized contractors – face growing business risk when embarking on new projects, due to issues such as contracts that are heavily amended to favour large contractors or clients, unclear delivery dates, and – crucially – delayed payment or non-payment.

Wanda Merrington, Director at medium-sized sub-contractor Combined Flooring, says efforts have been made over the years to make the environment fairer for small and medium-sized sub-contractors, but that there are still serious challenges facing them. “The small sub-contractor in particular, may not have the cash flow and resources to wait months for payment by the Main Contractor, or have the cash to take legal action in the event of non-payment or a dispute. In many cases, they don’t receive sub-contracts documents, or they receive contracts with many amendments. They don’t challenge the exclusions and clauses that have been altered, because they may need the work. They may also not keep themselves up to date with the contract data and extensions of time on completion dates and lose out on timeous cash flow as a result”

Merrington believes that a stronger focus on ethics, transparency and the fine print on sub-contract documents, would go a long way towards reducing the risks faced by smaller contractors in the construction sector.

She explains that significant amendments to sub-contract documents, could virtually eliminate any rights the sub-contractor should have had in terms of the Master Builders South Africa Sub-Contract document.

These may include new rules, or a ‘pay when paid’ clause. Merrington adds that the sub-contract agreement should contain details of the entire contract and variables, but in many cases, this is not included, so the sub-contractor may be unaware of these. “Sub-contractors – particularly those who are new to the industry – don’t always know what their rights are, so they accept a document that has been altered. They should know the completion dates,” as penalties creep in causing unnecessary disputes, she says.

Accepting the “pay-when-paid” principle often is used as a “paid if paid” and may mean that smaller contractors get paid late or sometimes for certain extra’s, not at all. Most cannot deal with unpredictable cash flows and are forced to shed staff or even go out of business.

A major contractor who prefers not to be named says: “Although there are many unscrupulous contractors out there implementing many unethical practices, I can only talk from our position which I believe to be a balanced view. Unfortunately, we are in an environment where all these restrictions are being imposed onto main contractors from tender stage, clients are imposing 45 to 60-day payment terms. 

You are forced to accept heavily amended Joint Building Contracts Committee (JBCC) documents or your tender will be disqualified, the only way to survive as a main contractor is to create an even playing field throughout the entire value chain and impose the same conditions on sub-contractors. One needs to understand that with the current margin structures, if a main contractor has to pay sub-contractors (which make up approx. 80 % of the contract value) within 30 days and his payment terms are 60 days on a large commercial project, it will literally shut the business down, taking with them many more sub-contractors as has been the case over the last few years. I heard a very interesting quote once that is very relevant to this topic, ‘we are taking aim at the mice but missing the elephants.”  

He says: “We need to tackle the root of the problem which starts at Developer/Client, PQS and PM level. The current market margins for Main Contractors are yielding values between 0 % to 1.5 % (effectively a loss when adding overheads), you are forced to sign away your lien with no payment guarantee and your payment terms are extended (this is now common on all tenders that we price). This is an absolute recipe for disaster. It has a devastating effect all the way down the line onto small contractors and cannot be sustained by them, the only solution lies with tackling the problem at the origin.”

He adds: “We need to get complete buy-in from all role players in the built environment to agree consistent payment terms, this means getting someone like SAPOA involved to apply pressure on development and funding entities to restructure their payment thinking. You could also potentially split certification between provisional sums and domestic contractors thereby taking care of the smaller more vulnerable contractors first.”

Mohau Mphomela, Executive Director of MBA North notes that the JBCC and Master Builders South Africa contract documents are designed to simplify the administration of construction contracts, implement best practices and industry standards, and spread risk equitably across the construction value chain. He says that the practice of amending JBCC and other built environment contracts to, for example, insert conditions such as “pay-when-paid” puts all players in the value chain at risk.

“JBCC and Master Builders contracts are designed to create a fair and standardised business environment, and to ensure that all parties are protected. Unauthorised amendments to these documents, especially payment clauses, should be immediately flagged and reported to the Master Builder Regional Associations, ASAQS and SAPOA,” he says.

Bradley Boertje, Risk Management Consultant and adjudicator for MBA North, says one of the key reasons that contractors find themselves in difficulties is that they do not understand the implications of the contracts that they have signed or the risks they become exposed to as a result. “Many have a poor understanding of how contracts work and a tendency just to sign any document simply to get work. This kind of short-term thinking ultimately sees so many contractors finding themselves in lengthy and expensive disputes and often not getting the payments they expect,” he says.

He recommends that contractors consult a reputable risk consultant before they enter into a contract. Should they find themselves in a contract which looks like it is going sour, MBA North offers initial contractual and commercial advice for free to its members. It also offers a series of webinars to provide contractors with the basic information they need to keep their contractual affairs in order. o