Contract Management and Debtor Control in a Down Market 3

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Wednesday, September 21st, 2016
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The Australian economy is showing some early signs that it is starting to run out of steam. In a recent media release, the Australian Financial Securities Authority revealed that the number of personal insolvents increased by 11 per cent and there was a spike in business related personal insolvencies by a factor of 20.6 per cent in the June quarter when compared to the same quarter in 2015.

The reason for increased insolvencies was said to be economic conditions. A further drop in interest rates highlights a determination to keep debt sustainable, which underlines the heavy dependence this country has on debt to maintain an economic status quo that is increasingly reliant upon shifting sands.

For those who point to the record number of cranes currently working on projects, it’s important to note that work in progress. Focus instead on the drop in new starts (occupancy certificates) and building permits. The insolvency statistics marry with an uptick in debt recovery instructions in our legal practice, induced by progress payment defaults. For the first time in decades, there is an upward trend where subcontractors and builders are being drip fed, paid late, all because cash is just starting to dry up in certain arenas.

There are also signs of a bourgeoning ruthlessness on the part of principal contracting parties as the blue skies that we have become so accustomed start to cloud over.

We are seeing more instances of progress claims being knocked back on a spurious basis and it’s the old case of “sure, sue me buddy – we’ll drag it out and you’ll have to wait and spend plenty.” This was the way things were in the early 1990s and it doesn’t bode well.

So how does a contractor prepare for an entirely different paradigm, a scenario where there will be more instances of payments being drip fed, project stop-starts and more instances of the powerful leveraging off the vulnerable punter’s desperation for cash flow?

There are a number of things that can be done, but it requires proactive and preemptive contractual administrative reengineering and above all a mindset that is recalibrated for different conditions. In challenging times, it’s the paperwork that often saves you.

Here are a few tips:

  1. If you are taking on new work don’t touch “a take it or leave it” contract. When everyone’s making money, the draconian provisions in these contracts are sleepers and the contract often gathers dust in the bottom of the drawer. Not so when economies tank; the nastier elements of the TLCs are deployed without fear or favour. It follows that you must be prepared to say no to TLCs because in a challenged economy, a “no wriggle room” contract can send you to the wall.
  2. Get your lawyers to check your contract before you sign up. Get educated on the intricacies of the contract so you know it like the back of your hand. Spend that little bit of due diligence money on your lawyer if you want to save plenty in the long run. It’s a false economy to save on spending a little up front only to haemorrhage at the back end.
  3. With current or existing contracts, read them again. Make sure you are complying with them to the letter, embrace them like a zealot or a fanatic. Dot every I and cross every T.
  4. Lodge your EOTs on time, fill them out precisely, and don’t lift a finger on variation work unless the VO is co-signed and there is clarity on cost and scope of work. Remember, the spoken word is little more than a noisy breath and what your client said rarely marries up under the blow torch of cross examination with what you said. Get it all in writing.
  5. Be right on top of your payment default provisions – don’t fall for the drip feed. If payments are late, use your default provisions and if need be – as long as you have the contractual mandate – suspend or terminate. But only invoke these remedies once your construction lawyer is all over the contract. You don’t want to come a cropper because of shoddy paperwork, because if you repudiate, you’ll be cactus.
  6. Remember the saying “when the shark bites, stop the bleeding.” If you are being drip fed, you are actually financing the job and it will inevitably send you under. Sometimes, it’s better to get your lawyers to enable you to get out quickly and cut your losses when progress payments are compromised. Banks say “the first loss is the first loss,” which bears testimony to the danger in letting matters get out of hand. Don’t brook a scenario where you cop late payments because of verbal assurances that payments are imminent. One of the good ones is “once we get paid on the other job, you’ll be looked after.” The form guide will tell you that if you try to brass it and don’t enforce your contractual remedies, you will be owed more and more and before long you get to a point of no return. A disingenuous client will want you to keep working regardless, for if you down tools, then this ups the line.
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3
  1. Kerry Taylor

    This scenario is a classic example of using Industry Specific Fully Integrated software to manage not only the contract, the retentions but also the budget to actual in "real" time. In addition over runs management and forecasting can also be done in real time.

  2. David Chandler

    Kim, another instructive article. I hope for many it is not too late and the horse bolted. Yes good administration and software will help if the dealing terms are conscionable. But it is hard to help out firms who just do dumb business. The trouble is if the coming downturn gets a lot of these businesses they will wreak damage across the whole sector. Not sure what the answer is. It is hard to insert commonsense. And another factor to bear in mind is that screwed suppliers look to cut corners. That means installation of non-compliant work. I hope the financiers of affected projects have their contractors and certifying consultants on notice that if they have induced client payments for non-conforming work that their PI insurers should be on notice. Its time that the construction industry's clients are assured that they are getting their projects in full. Interesting times ahead, guess you will be busy.

  3. James O'Donnell

    This is a very useful guide Kim on instilling in all involved in the construction industry that contracts should be read, understood and administered with great care and attention to detail. It is crucial that the contract is managed well and all mechanisms available implemented as and when required to ensure works and services do not continue if monies due are outstanding. Further, agreements in writing are far more reliable than verbal words if an when a dispute arises.