Robbing Peter To Pay Paul
Robbing Peter to Pay Paul has been synonymous with the industry for a very long time, in fact for over 400 years, where funds were borrowed from St Peters Cathedral to fund the Construction of St Pauls. Despite all the reviews and papers, the slow and Payless culture remains as strong as ever!
Introduction to Payment Issues in Construction
Robbing Peter to Pay Paul has been synonymous with the industry for a very long time, in fact for over 400 years, where funds were borrowed from St Peters Cathedral to fund the Construction of St Pauls. Despite all the reviews and papers, the slow and ‘Payless’ culture remains as strong as ever!
Understanding the Roles of Clients, Contractors, Subcontractors, and Suppliers in Construction Payments
The structure of the industry as far as payments are concerned is convoluted, slow and cumbersome. Each party Robing Peter to Pay Paul in some capacity or other.
Client objectives are to project and make a profit on a property or land deal, sufficiently high, to keep the funding flowing.
Contractors competitively tendering and juggling project payments and issues faced on jobs outside the project. For some contractors' the policy is to divert payments from the project to investments elsewhere financing/liquidating assets prior to bringing the cash back into the project.
Less commonly known as 'Cash Farming'.
This places the risk on the project, with clients and subcontractors alike.
Subcontractors often find themselves on long payment terms, possibly 54 days or more, yet having to pay for labour on a weekly basis - an expensive way to find a project!
Suppliers at the bottom of the food chain find their payments delayed even further, due to the time it takes for the cash to move from funder to client to contractor to subcontractor, as well as moving in and out of the project at various stages due to organisations Robbing Peter to Pay Paul.
Common Payment Issues in Construction
Common issues arise through, problems with funding cash drawdowns, changes in specification after the project has been let, delays due to unforeseen circumstances, site logistical and delivery problems, productivity issues, labour and materials availability, claims and assessment of claims.
Solutions for Clients in Construction Payment Disputes
Clients have a tough time finding deals that stack up, in a way that their financier's risk exposure will endure. Often this leads to optimism over construction and other development costs. Predicting outturn costs can be very difficult and needs a significant level of data, experience, planning and management to get this within a realistic tolerance.
Payment disputes can be mitigated by informed and realistic expectations over costs, even if it means moving on to the next deal if the current deal doesn't stack up.
Careful selection of contractors, early assessment of the supply chain and ability to manage it. Together with the establishment of a 'Project Bank Account, is among a few measures.
Solutions for Contractors in Construction Payment Disputes
The industry expects its contractors to be expert builders, which they are or should be! However, there is an often unspoken requirement for the builder to also be an expert supply chain accountant - how often is this tested in pre-qualification documents? And should we b asking this of a contractor at all?
Should we not let the builder build and manage certification for quality and production and leave the money flow to a specific neutral party, responsible for moving cash throughout the supply chain?
Solutions for Subcontractors in Construction Payment Disputes
Similarly, with subcontractors, should we leave them to juggle cash between projects, a pretty hard call if they are also juggling long payment terms.
Knowing the money remained in the project, money to pay for labour each week, for example, may go some way to alleviating their stress.
Solutions for Suppliers in Construction Payment Disputes
Suppliers are often brought into a project long after the design team, the quantity surveyor or the project manager. They may not even price a project until a contractor has been appointed. It's no wonder there remains uncertainty around supply costs after all the budgets have been set. Often a delay in sourcing raw materials, or for that matter problem with logistics in distribution and delivery, are not passed up the line and are often covered up, only to be disclosed during a dispute or claim.
Tips for Avoiding Payment Issues in Construction
1. Clients' early consultation with funders
2. If the deal doesn't stack up, don't sweat it; go on to the next one.
3. Look at using project bank accounts
4. look at a single point of responsibility for managing and distributing the cash throughout the supply chain without the need for contractors, subcontractors and suppliers to pass cash down the line or rob Peter to pay Paul.
5. Establish a central single open communication line throughout the supply chain - overcoming the silent ‘Chinese Walls’ which arise in response to the use of traditional contracts.
Conclusion
There needs to be a change and there has never been a better time. Cash needs to flow to each participant in the supply chain from the funder down to the supplier of raw materials, but not through a zillion hands as traditionally done. In this way, the health of a project, like the health of our bodies, can be assessed by how the blood is flowing, and so to the cash flow through a project.
