The Civil Engineering Contractor April 2019 | Page 40

business by not paying, or paying
subcontractors or suppliers late,”
explains Putlitz.
He goes on to say that the
typical excuse in the contractor–
subcontractor relationship is that
subcontractors will only be paid
sometime after receipt of payment
from the employer, also known as the
‘pay when paid’ clause. Furthermore,
he says that subcontracts are
unilaterally altered without agreement
of the subcontractor. “Unfortunately,
there’s no contractual nexus between
the subcontractor and client. The
subcontractor is required to follow
the remedies contained in his contract
with the contractor,” Reyneke says.
This ends up causing a host of
problems in the relationship and can lead
to the subcontractor suspending works in
protest as non-payment. “In South Africa,
the Public Finance Management Act
(and comparable municipal legislation)
specifies that payment is due within 30
days of date of invoice or when a payment
certificate is issued in terms of a standard-
form contract, which is seldom adhered
to. This constitutes a breach of contract by
the employer, and the contractor is within
his rights to terminate the appointment,
provided the stipulated notice procedures
are followed,” shares Putlitz.
Prompt payment
regulations
In 2015, steps were being taken by the
Construction Industry Development
Board (cidb) to try and rectify
the process by proposing payment
terms that would be applicable to
38 | CEC April 2019
construction contracts concluded
between main contractors and
subcontractors. The cidb proposed
gazetting Prompt Payment Regulations
to regulate certain aspects of the
payment regime applicable in such
contracts. The legislation is called the
Prompt Payment Regulations and was
published for comment in 2015. One
of the objectives of the regulations was
to level out the playing field between
main contractor and subcontractors
regarding payment terms in their
respective contracts.
Generally, subcontractors are
often forced to accept onerous
payment terms, which are prejudicial
when applied. An example is the
pay-when-paid provision included
in a subcontract. As a result, the
subcontractor is unable to demand
payment for subcontract works
completed until the main contractor
is paid by the client. In most cases,
such terms affect the subcontractor’s
ability to execute subcontract works
efficiently and effectively, forcing him
or her to carry the burden of carrying
out and completing the works without
a clearly defined period within which
to be paid.
The regulations offered an
opportunity for contractors and
subcontractors to work together
in the interest of successfully
completing subcontract works while
protecting the subcontractor’s cash
flow during execution. The proverbial
‘cash is king’ rings true in such
circumstances, asserts Tsele Moloi,
associate at MDA Consulting. Cash
Tsele Moloi, associate at MDA
Consulting.
Natalie Reyneke, senior associate at
MDA Consulting.
Uwe Putlitz, CEO of JBCC.
BUSINESS INTEL
flow determines how a subcontractor
can execute its obligations and has
an indirect impact on its ability to
be financially sustainable in the short
to medium term. Delayed and/or
late payments do the contrary in
developing small- to medium-sized
enterprises. This way of working in
a fragile and stagnating industry is
taking the industry backwards.
The legislation seeks to outlaw pay-
when-paid clauses. “The movement to
outlaw pay-when-paid clauses started
in New Zealand about 12 years ago and
has subsequently spread throughout
the Asia-Pacific region and most of
Europe. South Africa will apparently
introduce similar legislation during
2019 that will require payment in
full within the period stipulated in
the standard-form contract used, or
the employer must give notice to ‘pay
less’, with reasons. Another aspect
of legislation will include that the
(sub)contractor may accept a reduced
payment — or declare a dispute
to be resolved by an ‘immediate’
adjudication process,” says Putlitz.
One of the issues that Reyneke has
come across is that subcontractors do
not read contracts to assess whether
the terms of such contracts are
suitable to their business and specific
risk appetite. “They don’t have the
knowledge nor the resources to make
sure they are protected in contracts.
Subcontractors are often bullied into
signing subcontracts containing non-
favourable terms (such as pay-when-
paid provisions) and contractors
adopt a ‘take it or leave it’ stance
www.civilsonline.co.za