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OPINION: Non-Payment: Prevention Over Cure

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With non-payment being a "norm" more than an anomaly in the construction industry, it is necessary for construction business owners and professionals to equip and educate themselves on the available measures to protect themselves against non-payment by clients. The survival of the industry and the development of the South African economy is dependent on our ability to build small & medium enterprises, and these entities are hardest hit by non-payment challenges.

Non-Payment: Prevention Over Cure

"As in any commercial activity, cash flow is vital for the survival of construction
businesses" (Ramachandra,2013). The fragmented nature of the industry means that payments need to be made to multiple groups at various stages of the project: deposits for long lead items, purchase of consumables, payments of daily or fortnightly wages and so on. Some of the effects of non-payment for contractors and service providers are:
  • Inability to retain employees
  • Challenges maintaining plant and equipment
  • Material and logistical challenges
  • Inability to complete activities or the entire project
  • Inability to make a living
The effect for professionals is an inability to maintain their livelihoods and for the industry at large this will lead to a loss of skilled professionals.

Two affected contractors in the Gauteng area shared their story with me. Contractor 1 was doing work for a returning client. The client paid for the original scope of work in full. However, the requested variations, worth R80 000 went unpaid. The work to be done could not be completed. Contractor 1 is currently looking for legal representation to assist with the matter after numerous calls went unanswered. Contractor 2 undertook work to the value of R2.3 million for a referred client, an initial deposit was paid but the follow up payments were not. Contractor 2 has already involved an attorney and sent several letters of demand with no success.

The most obvious method of recourse is suspension of construction works or duties. Although effective, this might not be an option for subcontractors and smaller construction businesses as there is often no clear contract in place leaving the contractor open to the risk of being replaced or being forced to pay for any loss of income to the client because of the delay. There is also a risk of negative reviews and damage to one’s professional reputation.

Small contractors and start-ups should consider the following before undertaking a project:
  • Exercise prudence before starting the job: who is my client? What assurance do I have that they will pay?
  • Is there a written agreement or contract in place?
Contractors should also make all efforts to improve their levels of knowledge. It is important to read up on contractual information, the forms of recourse that are available for small contractors and most importantly how to plan for project risks, one of which is non-payment. An understanding of payment schedules, payment certificates, payment guarantees, common law, and quality assurance procedures are key to improving the ability to plan for project risks, especially financial ones.

The following organisations also assist with financial disputes:

Building disputes tribunal – an independent entity that assists with the resolution of disputes between clients and contractors. They service disputes for projects with a value of less than R1 million. They also provide simplified contracts that can be used for small projects.
 Contractor training programmes are restricted to Western Cape for now. https://bdtsa.org.za/

Small claims court – No formal legal representation is required. They assist with disputes for amounts less than R20 000. https://www.justice.gov.za/scc/scc.htm 

The growth of small and medium enterprises is vital to the stability of the construction industry and the economy at large. In the last 2 years we have also seen non-payment affect large corporations many of which are now in business rescue. Although it can be argued that prolonged project durations and poor workmanship play a role, non-payment should be the last resort. It is the responsibility of professionals, clients, and contractors to preserve integrity and fair business practice within the industry.

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