Late Payment: What Can We Do When We Don’t Get Paid?

What can we do if we don’t get paid? We get this question a lot. In some regions, this is less of a problem because legislation is quite strict on payment terms, but in other parts of the world it is very common for the paying party to hang onto their money for as long as possible.

Most forms of construction contract will include some sort of remedy for non-or late payment, so you will need to check what these are on your projects, but as an example, let’s have a look at what the FIDIC Red Book, 1999 Edition has to say about late payment.

Sub-Clause 14.8 (Delayed Payment) states that:

‘If the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 [Payment], irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued.

Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment, and shall be paid in such currency.

The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy.’

This provision is quite clear and as soon as the payment is overdue I would be inclined to submit a notice that a claim for financing charges will be submitted. The notification should serve as a polite reminder just in case the payment is stuck in the Employer’s system, or the Engineer has failed to issue the payment certificate.

If the notice resolves the problem, then all is well, but if not, and the payment continues to remain outstanding, I would prepare a claim for financing charges and submit it at monthly intervals until the payment is made.

I would say here, that such a claim is less about recovering additional money – the amount will not add up to very much – but more about making the Engineer and Employer aware that you will insist on your rights if they do not perform their contractual obligations and hopefully, this will make them think twice about repeating the default.

FIDIC gives the Contractor additional rights under Sub-Clause 16.1 (Contractor’s Entitlement to Suspend Work), which states that:

‘If the Engineer fails to certify in accordance with Sub-Clause 14.6 [Issue of Interim (Payment Certificates] or the Employer fails to comply with Sub-… or Sub-Clause 14.7 [Payment], the Contractor may, after giving not less than 21 days’ notice to the Employer, suspend work (or reduce the rate of work) unless and until the Contractor has received the Payment Certificate, reasonable evidence or payment, as the case may …

If the Contractor suffers delay and/or incurs Cost as a result of suspending work (or reducing the rate of work) in accordance with this Sub-Clause, the Contractor shall give notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to:

‘(a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and

‘(b) payment of any such Cost plus reasonable profit, which shall be included in the Contract Price…’

From the above, the Contractor may, after submitting a 21-day notice, either suspend the Works or reduce the rate of progress and will be entitled to an extension of time arising from such actions and the recovery of Cost plus profit. If we consider that Cost could mean demobilisation, remobilisation and prolongation costs, then this could soon mount up to a considerable sum.

The 2017 edition of the FIDIC Red Book contains slightly changed wording to the above two clauses, but they are essentially the same as the 1999 Edition in relation to failure to pay.

My recommendation would be to submit the 21-day notice as soon as the payment or certificate becomes overdue. Again, this may serve to resolve the situation and if so, the notice will have achieved the required result.

From experience however, I find that contractors are reluctant to take the suspension route and actually continue to work normally after the 21-days have expired. Whilst such willingness to progress the work must be applauded, I have to question the wisdom of such an action.

If you don’t suspend, there is no delay and thus, no entitlement to an extension of time or payment of cost. If the Contractor continues to work at a reduced rate, he will subsequently have to prove that he has reduced the rate of work, which can often become problematic.

I once rejected a Contractor’s claims in such a situation because, when examining actual against planned progress, the progress had clearly not been reduced. I would certainly recommend that contractors seriously consider keeping their resources away from site for a couple of days and would suggest that such an action will unlock all but the most serious of issues. If the Employer does not pay when faced with this situation, then questions must be asked about his ability or willingness to pay for the rest of the project and if this is the case, does the Contractor wish to keep digging himself into a deeper financial hole…

I will end with a question: is it easier to obtain payment when the Employer still needs something from the Contractor, or when the project has been completed? I will leave you to work that one out for yourself.