The Civil Engineering Contractor April 2019 | Page 39

BUSINESS INTEL
The vicious cycle
of late payments
Late payments to contractors on a project are a slippery slope that some experts believe can only be solved by law.
By Ntsako Khosa
Despite calls from government and various institutions to facilitate the growth of upcoming
and smaller contractors, what is being experienced in the industry, regarding late
payments, is contrary to facilitating that growth.
L
ate
payments
in
the
construction industry are a
common occurrence, which
Uwe Putlitz, CEO of the Joint
Building Contracts Committee
(JBCC), says is a global phenomenon.
Natalie Reyneke, senior associate at
MDA Consulting, a legal consultancy
firm that specialises in construction
and technology matters, explains
that payments in the construction
industry do not work the same way
as conventional payments do; for
example, payment for goods and
services are made after the services
have been provided or goods have
been delivered. “Clients don’t
pay for a building only when it is
finished. Realistically, a contractor
requires cash flow to pay workers
and to procure equipment and
materials during the lifespan of the
project. Contractors are generally
not required to finance projects,
and the client is obliged to make
regular/monthly payments based on
measurement of works executed to
date,” she says.
“Without payment for services
rendered, service delivery comes
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to a halt sooner or later when the
contractor can no longer afford
to pay staff and suppliers from his
own resources,” Putlitz says. As
was recently reported with the
Giyani wastewater project, where
engineering firm Khato Civils
stopped working due to non-payment
over a few years.
To provide assistance to contractors
in the early stages of the project,
construction
contracts
make
provision for advance payments to be
made to contractors. These advance
payments are interest-free loans that
are advanced by the client to the
contractor for mobilisation. “These
advance payments are repaid through
percentage deductions of payments
due to the contractor for works
executed to date,” Reyneke adds.
The subcontractor
According to Reyneke, although
standard-form construction contracts
are used in the industry, the
contracting parties often amend these
contracts heavily. Subcontractors
are often not only subjected to the
terms of the ‘main contract’, but
their own subcontracts contain
terms that remove the contractor’s
obligation to pay the subcontractor
for works executed to date until
payment is received from the client.
“The standard-form contract [the
JBCC] used in the South African
building industry (in its unamended
form) does offer some protection
to subcontractors in the form of the
client prescribing that the contractor
must pay the subcontractor an
advance payment, or an ability for
the client to pay the subcontractor
directly if the contractor fails to make
payment of a certified amount due
to the subcontractor. This amount is
then deducted from the payment due
to the contractor,” says Reyneke.
One of the common reasons why
money doesn’t always move down the
chain, is because “Various role players
have chosen to ignore the ‘standard
business procedures’ to get others
to fund their businesses by delaying
or making part payment to service
providers — be it developers who
have appointed building consultants
‘on risk, subject to finding a tenant’,
or contractors who fund their
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