Collecting Principal Payments 1

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Tuesday, September 13th, 2016
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The head contractor’s gone bust. Now the principal wants you to keep working and to pay you direct. Watch out!

When the head contractor goes down, you get that feeling of terror that all that work will never be paid. Then there are those feelings of anger when you ask yourself why you didn’t chase your money earlier. You are four months out on payment and seemingly it’s a loss you will have to bear.

That’s when in comes the principal to save you.

“We’ll pay you direct. Just keep working,” they say. And so away you go, working like mad to get the job done.

Then you submit your claim in the relief that your work has not gone for nothing. And what does the principal come back with? See if any of these sound familiar:

  • “We are not in a contract with you.”
  • “You did not do any work for us.”
  • “We don’t owe you any money.”

You were so grateful and relieved that the principal offered to get you paid, so joyful that someone has stuck their hand up to pay you, so thankful that your work will get paid that you forgot to do something crucial: gett a new contract signed!

What so often gets ignored is that this situation requires a brand new agreement. The contract with the head contractor does not function anymore. Principals will rarely novate the contract to themselves; they will not simply step into the head contractor’s shoes. All they agree to do is to pay you direct. This leaves you with a pretty vague arrangement.

The worst part is, there is nothing in writing to state you are now in a contract with a new entity, the principal. There are some amazing cases where the principal has ridden the subcontractors into the ground to complete the project and then denied any liability.

You can avoid this by doing some key things:

  1. Get it clear in your head that this is a new contractual agreement. Suggest that a new contract be signed, even if it’s the same one as you had under the head contractor. If the principal gets upset at this, you know you are in for problems if you proceed. It’s a good acid test.
  2. Remember, the contract needs to note that the principal will be liable for all work done under the previous contract and from the new agreement going forward. This may not work, but give it a go. The principal may rightly argue that they paid the head contractor (who in all likelihood failed to pay the subbies) and should not have to pay for the work twice. Ask the principal to detail exactly how much they had paid the head contractor for your work.
  3. Review the scope of works of the original contract and cut out all the work already completed and paid for under it. You want to end up with a scope of works that applies just to this point going forward.
  4. Draw up a detailed reconciliation of amounts invoiced, paid, and owing up to the point of the principal taking over. This will need to be incorporated into the deal so that you get paid for work unpaid by the head contractor. If the principal has refused to do this, then at least you can show the principal what the balance of the contract value is. This is important, as it will help you agree on the lump sum of the new contract. All too often, a principal will argue that the value of the work at the time it took over was far less than it actually was.
  5. Make sure that the entity that has taken over the work is actually the principal and not a one-off company designed to complete the job and then fold. Do an ASIC search and credit checks. Of course you will in the first instance have to ask for the exact name and ABN of the principal. In doing this you will be doing better than most contractors out there. Again, if the principal is reluctant to provide their details, then you know you are headed for trouble and you may have to rethink completing the job.
  6. Last but not least, get the darn contract signed! After all that preparation, you would be mad to start work again without the new agreement signed. Principals will pressure you to start or keep going on the promise that they will sign a new agreement. Don’t fall for that one. Get it signed.

The key lesson here is to not let the relief go to your head. As far as you are concerned, you are entering into a new agreement. So do what you always do; quote it, get a contract prepared, and get it signed.

In short, don’t assume that principals have principles.

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  1. Robert Timms

    My understanding of contract law is that from a technical point of view, the critical elements of a contract (an offer, acceptance, intention to create legal relations and compensation) are in place even if the agreement is verbal. That said, of course until something is in writing, there is no actual evidence of the contract even if it might technically be in place.

    Generally speaking, the above article sounds like good advice. One thing which on major contracts at least would avert the need for all of this is project bank accounts.