How to manage risk and get paid across a project life cycle
On securing a project (large or small), how often have you heard something along the following lines: ‘don’t sweat the details, we’ll sort them out later’. We know all too well that time pressures before and during a project make this an all too common occurrence.
When inevitably something goes wrong during the project lifecycle, your sentiment can quickly change to ‘I wish I sorted out those details upfront’.
Here at Axis Construction Law, with years of experience working across the key aspects of a project lifecycle (and seeing first-hand what can frequently go wrong), we ‘sweat the small stuff’ for you so that you can reduce your risk exposure and ensure you get paid what you’re owed during and on completion of your project.
Below we set out, at a high level, four key areas we have experience working across and where we can help manage your risk during the project and get you paid over the course of a project’s lifecycle. Throughout this coming year, we will publish further articles that delve into the details of each of these five areas to provide further useful tips and tricks (along with what to avoid!).
1. Getting your construction contract right before you start!
There are several key clauses that every properly drafted construction contract should contain. These clauses are vital to set out the payment mechanisms, agree on any changes in the scope of the works, fairly allocate risk and liability between the parties, and provide efficient mechanisms to resolve disputes. It is vital to also include clauses that adequately cover important issues such as variations, the consequences of delay and disruption, quality and defects, and unforeseen conditions that arise during the project.
Payment terms need to be carefully crafted to avoid… well, essentially non-payment! But also clearly spell out when you can or can’t get paid for certain events (such as delays, increased costs or change in scope).
Check out our checklist for what you must include in your construction contract to ensure it’s up to scratch and fit for purpose:
https://archipro.co.nz/articles/misc/checklist-for-construction-contracts-axis-construction-law
2. Issuing Payment claims (instead of invoices)
A regular question we hear in the construction industry is ‘once I have done the work, what is the first step to ensure I get paid?’ The answer we often hear is ‘issue an invoice’. Wrong. The correct answer is issue a payment claim.
A validly issued payment claim gets the benefit of enforcement procedures set out under the Construction Contracts Act 2002 (the Act). If you simply send an invoice, you do not get these benefits.
If the payer fails to pay the amount set out in your payment claim by the due date and does not issue a valid payment schedule, the amount in your payment claim becomes a debt immediately due and owing. You will then be entitled to enforce payment under sections 22 and 23 of the Act. You may also have the right to suspend the works under section 23(2)(b) of the Act until payment is received.
The payer must pay not only the debt owing but also any actual and reasonable costs of recovery (which will include your legal fees). For these reasons, issuing a valid payment claim is an important step that puts you in a strong position to get paid what you’re entitled to.
Payment claims are relatively simple, they are essentially just an invoice with a little bit more detail. For information on how to draft a valid payment claim, see our article on payment claims:
3. Disputes and Adjudication
If a dispute arises on your project that can’t be resolved by agreement, adjudication under the Act is often the fastest and most cost-effective option for resolving small or large scale disputes.
Most straightforward adjudications take less than 6 weeks to go through the process to get a binding award.
To see an overview of the step-by-step process of adjudication or for more information, check out our blog post on adjudication timelines:
https://archipro.co.nz/articles/misc/adjudication-axis-construction-law
4. I have an award, but how do I get paid when the other party still refuses to pay?!
Occasionally, a party may simply refuse to pay up or may come up with various excuses to justify not paying, such as they don’t have the cash. You may think there is little you can do having just gone through the adjudication process.
Don’t get disheartened! The Act provides a practical solution to help with enforcement and recovery against a defaulting party who owns (or has an associated entity who owns) the construction site through the ability to secure a charging order over the site.
Charging orders are a powerful tool and an additional relief that can be sought in the adjudication process. By registering a charging order over the site, the owner will be unable to re-finance or sell the property until the awarded sum is paid in full.
What does this mean for you? It means you have some confidence and reassurance knowing that your awarded sum will ultimately be paid from any equity from the sale of the site. In the end, the defaulting party won’t be able to avoid payment, as much as they might try to. It also gives you time to assess what your next steps are and to begin the process of forcing the sale of the site to pay the debt owed to you. This exercise can take up to 6 months until the property is sold, but is an effective tool to get you paid in the end once any mortgages or encumbrances have been discharged.
If the defaulting party is a company, you also have the option of issuing a statutory demand. This is a formal notice to the company demanding payment of the awarded sum. The defaulting party is given 15 working days to pay and, if they do not, you can apply to the Court to liquidate them on the basis that they are presumed to be insolvent. This process puts immediate time pressure on them to pay up or face liquidation.
For more information on any of the topics in this article, feel free to contact our friendly expert team at Axis Construction Law.
*Disclaimer – this article is an overview of the topics discussed and is not to be taken as legal advice. We recommend speaking to a legal professional before undertaking any activity relating to matters discussed in this article.