Late construction payers could face hefty penalties

COMPANIES and public bodies that delay payments to contractors for construction projects stand to be heavily penalised should the industry adopt new rules to ensure the frequency of cash flow. Under the proposed guidelines, which have been opened for public comment for 60 days, contractors will be able to charge interest on outstanding payments and even suspend projects until payment is received. Interest has been set at the prime lending rate plus 6%.

COMPANIES and public bodies that delay payments to contractors for construction projects stand to be penalised heavily should the industry adopt new regulations to ensure the frequency of cash flow.

Under the proposed guidelines, which have been opened for public comment for 60 days, contractors will be able to charge interest on outstanding payments and even suspend projects until payment is received. Interest has been set at the prime lending rate plus 6%.

The move comes as the government — which is frequently blamed for tardiness in settling its debts — has undertaken to ensure that it makes payments within 30 days of receiving an invoice. The proposed regulations were tabled by the Construction Industry Development Board last month. Late payment was “practically killing the construction industry”, the state entity’s acting CEO, Inba Thumbiran, said.

“Late payment is one of the crippling constraints to effective infrastructure delivery,” Ms Thumbiran said. The unpredictability of payments often resulted in an extremely negative contracting environment, she said.

The South African Federation of Civil Engineering Contractors welcomed the proposed regulations.

“What is important is that the legislation will apply to all construction contracts, including subcontracts. This will provide quick and ready justice to subcontractors who are frequently abused by the main contractor,” federation CEO Webster Mfebe said.

The proposed regulations will outlaw what it called the “pay-when paid” principle, in which contractors withhold payments to subcontractors until they have received payment from their own clients. Dispute management would also be dealt with under the new guidelines, which seek to make adjudication mandatory for all disagreements between contractors and their employers.

“Under the present conditions, contract claims can take months if not years to resolve, resulting in the contractor being out of pocket for a considerable length of time,” Mr Mfebe said.

The aim is for disputes to be finalised within 28 days. Only in certain circumstances will the window be extended by 14 days.

Similar payment regulations have been introduced in the UK, Singapore, Hong Kong, New Zealand and Australia, according to MDA Consulting director Vaughan Hattingh, who said “the success rate (particularly) in the UK, had been high”.

The new laws are expected to benefit smaller construction companies, which find it more difficult to operate when payment is delayed.

Mpilo Dhlamini, director of Barbcity Steel Works and Construction, said: “It will make a difference because smooth cash flow ensures the effective delivery of projects.”