How do you receive payment for work done?

By Malcolm Abernethy
Executive officer
New Zealand Contractors' Federation

Questions about receiving payment for work done are often raised by smaller contractors. In 2002 the Government passed legislation to help contractors, particularly small operators and those performing subcontract works, in the form of the Construction Contracts Act.

The regulations allowed the Act to come into force on April 1, 2003 with some contractors welcoming it with open arms and adopting the processes required by the act. The Act cannot be contracted out of and makes clauses such as “pay when paid” and “pay if paid” illegal.

The intent of the Act was to improve contractors’ cash flows and prevent larger contractors and clients from using the payment due to smaller contractors as a cheap source of funding. A common activity leading up to the Act that saw, in some instances, small contractors and subcontractors being forced into liquidation or to raise operating funds by way of expensive overdrafts.

The problem the Act was intended to fix is still there in part. The Act allows for adjudication processes that work in part only. The adjudication prescribed by the Act was intended to be fast and cheap, but that does not appear to be the case. There have also been decisions made by adjudicators that have not been upheld by the courts, removing some of the power of the act. In addition, I am informed that the cost of going to adjudication can be relatively expensive compared with the value of a claim.

Dispute resolution can still be a relatively expensive option when compared with first following clearly prescribed procedures within the Act and then negotiating a solution to a dispute. I realise that in many instances a principle may be involved.

Recently I have been asked to comment and provide assistance to resolve a dispute between a contractor and a client. The work was poorly described in the first instance, with the scope of work being detailed by the wave of the arms and a nod of the head. The price was determined based on hourly rates for plant and labour and materials at cost. Basically, the contractor was asked to do the work until the money ran out. In addition, the contractor had to design the work as it was being constructed.

There were many issues around this dispute – the first point being that there was no formal agreement between the parties, apart from the verbal agreement, and the work was not well defined nor the total cost was not clearly identified. Each of these aspects by themselves can be accommodated, however, when they are combined, the issues multiply dramatically.

In addition to the basics of a contract not being clearly determined, the contractor did not refer to the Construction Contracts Act and the client did not have the funds to do even the minimum part of the project.

When claims were submitted they did not refer to the Act and no indication was made to the client about how they should react in terms of the Act. (It is the contractor’s responsibility to advise owner occupier clients of their obligations under the Act.)

Payment schedules were not prepared by the client and payment was not made.

So what is the recourse for the contractor?

The contractor allowed the situation to go on for several months by permitting the client to drip feed payment up to a total value of $12,000 when the client stated that that was the end of payments, even though there was a further $4500 claimed. The contractor, figuring it would be better to get some of the outstanding claim, discounted the claim by $4000 leaving just $1500 to be paid.

At this stage the client then started to question the workmanship and design with communication breaking down followed by angry written tirades between the parties (mainly from the client).

Now both parties want to seek recourse through the disputes tribunal which will result in the registration of the debt against the client’s name and a black mark against the contracting company.

The situation described could have been avoided by the use of the tools available to the contracting industry, ranging from putting a simple contract document that adequately describes the work in place, outlining the payments to be made and some time constraints within the project, demonstrating that both parties intend to be bound by the contract. The price could then be developed to allow the client to provide the payments as the work progressed.

As payment claims are submitted it becomes the responsibility of the contractor to detail the rights and obligations of the Construction Contracts Act to the client, making non-payment and the recovery of the money a relatively simple process, as the contractor then has the support of the Act.

This simple dispute could have been avoided by using the Act to both parties’ advantage. The contractor could seek adjudication for non-payment while the client could seek adjudication for lack of perceived quality in the product constructed.

With the Construction Contracts Act having been in force for more than five years it is time that all contractors use the provisions and processes prescribed.