This is one of the biggest challenges facing the construction industry.
Delayed payment is currently the norm in the Middle East construction industry. Everyone we meet complains to us about not being paid on time or in some extreme cases not being paid at all. We as professionals in this sector need to revisit the way we conduct our business to ensure that at least we minimise the effects of delayed or non-payment. Delayed payments lead to serious cash flow issues for consultants, contractors, subcontractors and suppliers, affecting performance and putting further financial pressures on all the parties involved.
These cash flow issues combined with a general downturn in the economy has therefore caused difficulty to UAE contractors in recent years.
Default on payment is a risk in any part of the world. Remedies already exist in most contracts to protect against it but there are circumstances that are unique to the region.
Sometimes main contractors may find themselves exposed to make payments to their subcontractors when they have not received payment from the employer. As a result, main contractors often include a “Back to Back” payment provision and passes the related risks to the subcontractors. "Back to Back" payment provisions are hated by all subcontractors. These provisions have even been deemed to be illegal in many parts of the world due to the negative effects such provisions had on subcontractors and rest of the construction supply chain. To work, these provisions must include a guarantee that the amount will be paid within a reasonable time, regardless of whether the employer pays the main contractor. Otherwise, such clauses may contribute to destroying several subcontractors or suppliers.
One way to combat this is by legislation. The government of Abu Dhabi has recognised this issue and has made moves to create some fluidity in the market. The Executive Council has issued a circular in March 2019 (circular No.1 of 2019) concerning the payment of dues to contractors and suppliers.
The Circular instructs government department and state-owned entities to:
pay contractors within 30 days of receiving the invoice, and
amend contracts to require contractors to pay subcontractors within 30 days of receiving payment.
If part of the outstanding invoice is disputed between the parties, the undisputed part must be paid. However, payment of the undisputed part shall not constitute a waiver of rights by either party until an agreement as to the outstanding amounts is reached in accordance with the contract.
The Circular does not offer contractors a new remedy for delayed payment, but it shows that the government has recognised the cash flow problems in the Emirate that are caused by late payment and back-to-back provisions. However, we continue to see delays in agreeing valid claims or applications for additional amounts and variations. We also see entities avoiding payment by disputing invoices unreasonably which in normal circumstances would be agreed as a way to delay payment.
Other jurisdictions have focused on improving the cash flow issue in the construction industry, for instance through the use of compulsory adjudication. Rapid statutory procedure, designed to protect cash-flow during the course of a project. Similar to the utilities companies’ approach to payment of their invoices; "pay first, argue later" approach.
We also need to understand, that we all depend on each other in the industry. If employers and developers do not pay the contractors and subcontractors, the economy as a whole will suffer. This will mean that the feasibility of the projects they are building will be affected. After all, these projects are not built in isolation. The weak link created by late or non-payment will come back to affect the same developers and employers in the form of consumer trust and general downturn in the market.
It is often said in construction contracting that “prevention is better than cure”, meaning that a contractor’s best defence against a defaulting employer is to minimise its risk in relation to payment at the outset. While this is undoubtedly correct, most contractors in the UAE are not in strong bargaining positions and, as a result, are reliant on measures aimed at recovering debts.
While you should continue to do your due diligence and pick your client, have strong collections departments, we can minimise these risks and late payment can become a thing of the past if we all work together.
You’d be surprised to learn how often a company sits on their contractual rights to suspend or terminate works, and then sits some more. They listen to promises from clients of future payment, and they worry about the ripple effects of filing a suspension or termination notice. They don’t pull the trigger and their debt ages beyond rescue. Don’t do this. Notices and claims are a fact of life on a construction project.