My main contractor pays later every month and I'm worried it will go under
Every payment lands a few days later than the last, and there's talk on site that the main contractor is struggling.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
What's happening?
While you wait to see what happens, your exposure grows every week. That is everything the main contractor would owe you if it failed today: the unpaid application, the work done since, your retention and the materials in the compound. Most subcontractors in this position do not know that figure. So they cannot decide how much more they are willing to risk.
You are not without tools. Section 112 of the Housing Grants, Construction and Regeneration Act 1996 gives you a right to suspend work. It applies when a sum due is not paid in full by the final date for payment, and no valid Pay Less Notice was given. A Pay Less Notice is the notice your main contractor must send if it plans to pay you less. You must first give at least 7 days' written notice stating your grounds. Applying on time and timing deliveries also keep the figure down. So does a default Payment Notice, your own notice of the sum due, when your main contractor sends none. The hard part is doing it every month, on a busy job, without damaging the relationship.
The solution
Find out what each job would cost you if the main contractor failed tomorrow, and set a ceiling you will not go past. Then stay under it. Apply on time, give a default Payment Notice when none arrives, and chase every overdue sum. Keep unfixed stock on site low. When a sum is not paid in full and the conditions are met, serve the suspension notice so the figure stops growing.
Insolvency Loss Prevention sets this up with you. We measure each job, agree the ceiling and build the routine that holds it, with a diary for applications and notices and the warning signs read monthly. The suspension notice is prepared and ready. If the main contractor does fail, Insolvency Claim starts from a file that already exists.
Example
Illustrative example. The scenario and figures are invented.
The facts
An electrical subcontractor on a £780,000 package notices its last three payments arrived 3, 8 and 14 days after the final date for payment. Two other trades have left site.
What happens
- Its exposure is measured: £64,000 unpaid, £41,000 of work since the last application, £23,000 of retention and £17,000 of cable and containment in the compound.
- A director sets a ceiling of £80,000 for this main contractor.
- Cable deliveries go weekly, the next application goes in on its due date, and a default Payment Notice follows when no Payment Notice arrives.
- When the £64,000 passes its final date for payment with no Pay Less Notice, the suspension notice is served.
- The main contractor pays the £64,000 within the notice period.
Exposure in figures
| Point | Exposure |
|---|---|
| When measured | £145,000 |
| Ceiling set | £80,000 |
| When the main contractor failed | £71,000 |
The outcome
The main contractor enters administration 2 months later. The subcontractor's exposure is £71,000, under the ceiling and less than half of the figure it would have carried in.