Businesses - Getting Paid in Recessionary Times

Rachel Stewart, a member of the Dispute Resolution team at Hughes Paddison, discusses what contractors can do to get paid in these cash strapped times.

There are various steps contractors and subcontractors can take to improve their chances of getting paid:

 If you wish to enter into a project with another party, and are going to be paid by them, carry out credit checks to get an idea of their financial stability. Although this will only provide a snapshot of the position at one point in time, it can flag up any obvious reasons for not doing business with them.

Establish the ground rules for payment in a written contract, before the start of the project. For example:

  • Try to secure an advance payment. This may be appropriate where there is a long lead in period during which you need to spend significant sums on items such as materials and subcontractors.
  • Agree a payment schedule. This will assist with foreseeable, on site costs.
  • Approach the project funder. Direct payments from funders are not uncommon, providing the funder is granted reciprocal rights under the contract.
  • Set up an escrow account. A bank account into which regular payments are made, and from which funds can be released when certain conditions are met, can be useful when there are cash flow issues. The contract needs to deal with who owns the interest, when monies can be released, and who owns it if a party goes into insolvency.    

Once the project is underway, comply with the contract terms. Make sure you submit regular applications for payment in accordance with the time periods set out in the contract, and issue notices without delay if payments are late. Keep a paper trail of all such matters, and do not allow a payment ‘backlog’ to build up.

Keep your ear to the ground. Are others complaining of late payment? Are people leaving site? Is there anything to suggest that future payments to you may be in jeopardy?

 If the paying party goes bust, act promptly:

  •  Check any retention of title clauses, and secure plant and materials which belong to you.
  • Check the payment provisions of any subcontracts and supply agreements, and speak to parties to agree alternative arrangements where possible.
  • Check if you have the benefit of any security, guarantees, etc.
  • Talk to the appointed insolvency practitioner and provide proof of debt.

There is no foolproof way to ensure that you get paid what is owed to you in the event of insolvency, but taking these steps maximises your chances of recovery.

If the paying party is solvent but will not pay, do not simply walk off site. Talk to us and we can advise you whether leaving site will place you in breach of contract, or whether you can legitimately take that step. We can write to the other party on your behalf, to agree what is to happen on site and to obtain payment. If this cannot be achieved amicably, we can advise on processes such as court action or adjudication, and guide you through the various stages of each.

Remember – the best way to avoid time consuming and costly disputes is to agree each party’s responsibilities and risks, from the outset. Hughes Paddison can help draft and negotiate the terms of a contract, including payment schemes and retention of title clauses as referred to above. If problems later arise, we can help you resolve these as swiftly as possible. Call Rachel Stewart or Doug Armstrong on 01242 574244.