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• 03 Feb

  Help Understanding Construction Contracts

  IMPORTANT NOTE: Nothing in this post should be considered legal advice, it is just our thoughts on steps to help get paid if you operate in the construction sector.

  There are a number of financiers that handle the construction sector and will be able to provide you with finance against applications for payment. The sector is widely subject to contractual terms, and these contracts are usually provided to the subcontractor by the main contractor.

  However, often contracts are signed without the subcontractor really understanding their obligations, and this can lead to non-payment, payment delays or an inability to raise finance against your contracts.

  7 Steps To Help You Get Paid In The Construction Sector

  Below are 7 simple steps to help make sure that you get paid, if you work within the construction sector:

  1) Read the contract

  Make sure you get a copy of the contract, and any referenced documentation, read it and take legal advice or advice from a Quantity Surveyor (QS) if necessary.

  You may be subject to terms in the main contractor's contract that will affect whether or not you get paid. You need to understand exactly what your obligations are, and be sure that you can meet them. Look for any clauses that refer to circumstances where you may not be paid, for example, the failure, or insolvency of the main contractor - this could negate your ability to raise finance against a contract - or to get paid at all.

  Often people sign contracts without reading the small print.

  2) Don't be afraid to ask for clauses to be struck out

  Often standard contracts are used, and these can place numerous standard requirements on your business - you can ask for the terms to be amended or certain clauses to be removed. This may be a pre-requisite in accessing finance against your invoices or applications for payment if the financier thinks that there are clauses that could stop you from getting paid.

  3) Professional indemnity insurance in respect of the design

  You may be required to hold such insurance as a contractual condition. Failure to maintain the insurance could place you in breach of the contract and could be used to avoid paying you.

  4) Getting Paid For Variations

  Being asked to supply more than the contract value may seem like a great windfall, and it may well be - but you have to get paid for doing the extra work. To make sure you get paid for the additional work, it is always best to get such variations agreed in writing. Again, this could be a prerequisite to getting funding against variations.

  5) Funding Invoices With VAT

  With construction finance, the VAT element of an invoice can be funded. However, if you raise applications for payment you cannot include the VAT element in the eligible debt against which to raise the finance. You may think - of a simple solution - raise invoices. First, you must check your contract, does it give you the right to raise invoices? Financiers will want to see your ability to raise invoices specified in the contract, in order to fund against the VAT element.

  6) Retentions

  Check how much is going to be retained and over what period. Typically 2.5% to 5%, of the contract value, can be held back to cover snagging (resolution of "snags" or problems with a job. Part of that amount may be payable on practical completion but at least part of it could be retained for a "defects liability period" of months, or even years. Again, read the contract and understand the terms. Retentions will be removed from the funding calculations of financiers.

  7) Liquidated damages, collateral warranties & bonds

  These are financial measures that may be included to ensure that you meet your obligations. Liquidated damages are fees for non-performance, and warranties and bonds can enable sums to be held by the contractor for a period of time, to offset any non-performance. You should understand your obligations and seek legal advice if required.

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  IMPORTANT NOTE: These are just some helpful pointers and nothing in this post should constitute legal advice, you should seek specialist legal advice before entering into any contract.

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  Related post: The Pitfalls Of Construction Contracts

  By Glenn Blackman