As we approach the second anniversary of the commencement of the Construction Contracts Act 2013, Sean Downey, Director Specialist Contracting, outlines how companies can use the legislation to protect their business.
It has been two years since the Minister for Jobs, Enterprise and Innovation, Ged Nash signed the commencement order for the Construction Contracts Act 2013.
Since our last commentary on the legislation we have had another 12 months of the Construction Contracts Act (CCA) and another series of examinerships and liquidations, with more potentially on the horizon.
Whilst this is primarily because of rising costs in an industry that is steadily getting busier, it introduces serious financial risk to companies operating in the sector and relying on the health of those above them in the chain and their ability to continue to make payment.
The legislation that came into force on 26th July 2016 was a big step forward for this industry. It places a statutory responsibility on those procuring construction works to pay their contractors and subcontractors. It prohibits the old excuse of ‘pay when paid’, provides mechanisms for dispute resolution, and allows a contractor to suspend works in the event of non-payment.
However, with a series of recent high-profile insolvencies and 17 school projects in 2018 alone suspended due to contractor financial difficulties we must still ask ourselves what is going wrong.
In 2013 the NDFA published a draft suite of guidelines aimed at assisting contracting authorities in their assessment of the financial capacity of tendering contractors. This ranged from very small works right up to projects over €20 Million and gave a schedule of the type of checks that should be employed to ensure that due diligence was being employed at tender stage. In light of the Carillion collapse one wonders to what degree the NDFA applied its own guidelines to the assessment of that SPV.
Applying stringent checks at tender stage may rule some companies out of the bidding process but surely will result in more sustainable tender prices being successful and perhaps rid the industry of the continued race to the bottom. It would also help us to move away from the current requirement of winning on price alone as the OGP considers the wider introduction of award by MEAT criteria.
The CCA itself is not a panacea. It puts a certain degree of demands onto both the entity procuring works and the contractor or subcontractor who is carrying out the works. Public sector contracts have moved very significantly over the past decade to demand more formal and procedural documentation for applications for payment and notification of any potential changes to the programme and contract sum. This is perhaps where a lot of subcontractors are falling short and with a lack of professional support are finding themselves exposed to the risk of poor payment and continued uncertainty surrounding their cashflow.
The CCA will point you towards your contract firstly and whilst construction contracts cannot be drafted to circumvent the Act they can introduce procedural steps that must be adhered to for you to get the benefit of the Act. If you sign up to a contract that states that you will serve your payment claim notices by registered post and fail to do so, the legislation will not support you in the event of a dispute.
CIF are regularly receiving calls from member companies who are about to sign contracts or who have signed contracts and are experiencing difficulty in agreeing ongoing payment amounts.
2018 has seen tender price increases of around 7% and this trend is set to continue as the skills shortage exacerbates and demand for construction services continues to grow with the continued development of larger commercial projects and the advancement of new residential schemes.
As we enter into the first phase on the NDP delivery stages we know that Ireland has a great record of delivering major infrastructural programmes and has the technical ability to step up and meet the needs of the expanding housing sector. For this to be a success, the clients of the industry need to take some degree of ownership and consider how they are procuring works. They need to have the oversight to analyse how healthy their supply chain is and consider payment protection measures to ensure that those who do the work get fairly paid for that.
If, like with the Carillion case, the state does not want to pay twice for the same work, it needs to put measures in place to ensure that money reaches those it is intended to. That may mean strengthening the existing CCA to provide certainty of payment or involve the introduction of other mechanisms that guarantee transparency and accountability throughout the project life cycle.
The solution for anyone engaging in construction is
- Get a copy of your contract and if you need help, get help to make sure that you understand what the terms and conditions of it are.
- Check what the requirements are around payment claim notices.
- Check what the requirements are around change notification for both time and cost
In effect we are still pointing companies towards the Top 10 items that you must know to be able to rely on the benefits of the Act.
Sean Downey, Director Specialist Contracting